Back in 2014, Jonathan Hill, the incoming European commissioner for financial services, was given the formidable task of unifying the continent’s capital markets. Two years later, his home country – which could have served as the hub for the EU’s capital markets union – voted to leave the organisation and Hill was out of a job.
But the idea itself is finally coming to fruition. New rules aimed at creating an EU-wide market for simple, transparent and standardised (STS) securitisations came into force earlier this year. And in a wild dash to the finish line before dissolving for elections in April, the European parliament approved a harmonised framework for covered bonds.
Not everything is going according to plan, however. In reality, the STS framework is proving to be anything but simple, transparent or standardised. Issuers cannot figure out which assets they are allowed to include in STS deals or what they need to report to investors, or even which supervisor will oversee the entire process.
As a result, asset-backed securities issuance has fallen in the first quarter of 2019. Regulators are hoping it is a temporary setback, a side-effect of introducing the rules before all of the accompanying technical standards had been adopted.
But the development of a genuinely unified market for STS faces a more structural problem: national banking and securities regulators are ultimately responsible for applying the rules, which raises the prospect of differing supervisory views on what constitutes a genuine STS deal.
The awkward question is whether, left to their own devices, market participants might have achieved a more harmonised landscape without regulatory intervention.
In the absence of a single supervisory authority to police European markets, there are no guarantees that the EU’s STS securitisation or covered bond markets will work as advertised
Under its own steam, the industry established the Prime Collateralised Securities initiative in 2012, with the aim of generating a Europe-wide benchmark for high-quality securitisations. Arguably, banks and insurers would still have needed regulators to ease capital requirements to stimulate the market for these securitisations.
The EU’s covered bonds legislation may fare better. While national supervisors are tasked with applying the rules, market participants expect greater consistency because cover pools are governed by national legal frameworks to make them bankruptcy remote. Some jurisdictions may need to alter their legislation to move in line with the new EU-wide regulation, limiting any potential divergence. Still, as with STS, the industry was already working on harmonisation initiatives, such as the covered bond label and the European covered bond council.
In the absence of a single supervisory authority to police European markets, there are no guarantees that the EU’s STS securitisation or covered bond markets will work as advertised, or achieve more than the industry could have done on its own. It will be some time before we see if EU regulators can create new markets, or if they should even try.