The European Securitization Market: Effects of an Uneven Regulatory Playing Field

Abstract

This article critically assesses the European securitization industry’s claim of the existence of an uneven regulatory playing field for securitization structures vis-à-vis financial instruments deemed ‘neighbouring’ to securitization by the industry, like whole loan pools, corporate bonds, and covered bonds. According to market participants, the adverse regulatory treatment of securitization is negatively affecting the European securitization market, by pushing issuers and investors towards other financial instruments that are treated preferentially. Ultimately, this prevents the securitization market from escaping the subdued state in which it has been ever since the global financial crisis. To address this problem, market participants are advocating a fundamental recalibration of the existing regulatory framework. By examining the regulatory framework that applies to securitization structures, against the backdrop of regulation for whole loan pools, corporate bonds, and covered bonds, this article confirms that securitization structures are indeed treated adversely, as claimed by the industry. Nevertheless, a valid comparison can only be drawn between ‘true sale’ residential mortgage-backed securities (RMBS) structures and mortgage covered bonds, given the structural-economic similarities between the two financial instruments. In that regard, the adverse regulatory treatment of RMBS is found to be negatively impacting the European securitization market, by fuelling a ‘crowding out’ of RMBS by covered bonds.