EU Proposes Reforms to Revamp Securitisation Regulations

On June 17, 2025, the European Commission proposed significant reforms to the European Union's securitisation regulations, aiming to stimulate bank lending and enhance the bloc's economic competitiveness. The proposed changes include reducing capital charges for banks and streamlining regulatory requirements, particularly for assets meeting the "simple, transparent, and standardised" (STS) criteria. These adjustments could lower capital requirements for banks by up to 50%. Additionally, the Commission seeks to ease due diligence and reporting requirements for investors and issuers to reduce costs and attract more investment. The proposal reflects longstanding industry complaints that the EU regime is overly stringent compared to other markets like the U.S., whose securitisation sector remains significantly larger. The package now awaits approval from EU member states and the European Parliament.

Securitisation involves transforming a pool of loans or other financial assets into marketable securities, which are then sold to investors. This process allows banks to transfer credit risk, free up capital, and extend new loans, thereby supporting economic growth. However, following the 2008 financial crisis, the EU implemented stringent regulations to prevent a recurrence of such events. These measures, while enhancing financial stability, have been criticized for stifling the growth of the EU's securitisation market. In 2024, the European Commission launched a consultation to assess the effectiveness of the existing securitisation framework, seeking feedback from stakeholders on potential areas for improvement.

The European Commission's proposal includes several key changes:

• Reduction of Capital Charges: The reforms aim to lower capital requirements for banks by up to 50% for high-quality securitised assets that meet the "simple, transparent, and standardised" (STS) criteria. This adjustment is intended to incentivize banks to engage more actively in securitisation activities.

• Streamlining Regulatory Requirements: The proposal seeks to simplify due diligence and reporting obligations for investors and issuers, reducing costs and making the securitisation process more efficient.

• Clarification of Scope: The reforms propose specifying that the Securitisation Regulation applies when at least one party involved in a securitisation—either on the sell-side or buy-side—is established in the EU. This clarification aims to ensure legal certainty and consistent supervision across Member States.

• Broadening the Definition of Public Securitisation: The proposal suggests expanding the definition to include transactions where securities are issued with an EU-approved prospectus, admitted to trading on EU-regulated markets or multilateral trading facilities, or broadly marketed with pre-defined terms and subject to market testing by EU originators or sponsors.

The proposed reforms have elicited mixed reactions:

• Industry Support: Market participants and EU officials view the reforms as a modernization of the post-2008 crisis framework, addressing concerns that the EU's securitisation market is underdeveloped compared to the U.S.

• Criticism from Financial Stability Advocates: Some critics argue that the proposals could compromise financial stability by undermining international Basel standards, which were designed to mitigate risks in the financial system.

If implemented, these reforms could have several significant implications:

• Increased Bank Lending: By reducing capital charges and simplifying regulatory requirements, banks may be more inclined to engage in securitisation, thereby freeing up capital for additional lending to businesses and consumers.

• Enhanced Economic Competitiveness: A more robust securitisation market could provide diversified funding sources for European businesses, enabling them to compete more effectively on a global scale.

• Potential Risks: While the reforms aim to stimulate economic activity, there is a concern that easing regulations could reintroduce vulnerabilities into the financial system, reminiscent of those that contributed to the 2008 financial crisis.

The proposed reforms are now subject to approval by EU member states and the European Parliament. The outcome of this legislative process will determine the future landscape of the EU's securitisation market and its role in the broader economy.