You are now leaving the PIMCO website.

Skip to Main Content
Economic and Market Commentary

Navigating the Challenges: EU Securitisation Regulation and Its Effects on Investors and Markets

Regulation has transformed the EU securitisation market, but there are further improvements that can be made.

The EU securitisation market has transformed significantly over the past 15 years, driven predominantly by regulatory change. But some of these developments may have impeded investment opportunities, and we believe changes to regulation should be made to both maintain quality and promote growth in issuance of securitisations in the EU.

Post-GFC regulations have contributed to a reduction in issuance and fewer investment opportunities in the European securitisation markets over the past decade (Figure 1). In the aftermath of the US subprime mortgage crisis, and the subsequent near-collapse of the European banking system, EU legislators and regulators understandably and appropriately addressed the root causes of the GFC. These include significant embedded leverage, poor diversification, and risky underlying lending practices across securitisation markets.

Figure 1: US securitisation issuance has outpaced European issuance since the financial crisis

Figure 1: The graph shows the issuance of European securitizations and US securitizations from 2007 to 2023. Both the US and Europe saw a precipitous decline in issuance in securitizations after the financial crisis, however since that time US issuance data has returned to more normalized levels, while European securitisations have remained at very low issuance levels. As outlined in this piece, we believe the lack of European securitization issuance is a result of more onerous post-crisis regulation in Europe compared to the US.
Source: J.P. Morgan as of 31 December 2023. Securitisation issuance includes asset-backed securities (ABS), non-agency residential mortgage-backed securities (MBS), collateralised loan obligations (CLOs), and commercial MBS. * US issuance in US dollars; Europe issuance in euros. Europe figures include both distributed and retained issuance.

Because of these regulatory changes, the EU securitization market has experienced improved loan-level diversification, significantly lower default rates, and much higher lending standards. But 15 years on from the GFC, market participants, legislators, and regulators have started to realise that certain aspects of the regulation are too challenging for securitisations to act as an effective credit channel in the EU.

Securitisation markets offer significant benefits to fixed income investors. They add diversification to the corporate credit risk typically held in fixed income portfolios, tend to generate an attractive level of yield per unit of risk, and have historically provided a low default rate for investors senior in the capital structure. Securitisations also benefit financial markets overall, as they inject capital into the economy to stimulate growth, and allow banks to transfer loan exposures to money managers. This frees up bank capital to make additional loans to consumers, real estate investors, and companies.

While PIMCO and the broader financial markets tend to see many of the post-GFC changes as positive developments in the securitisation space, we also recognise a secondary effect of some of this post-GFC regulation. EU securitisation issuance remains well below pre-crisis highs, while US issuance has seen continued growth. European institutional investors, such as UCITS funds (Undertakings for Collective Investment in Transferable Securities), were already constrained by stringent requirements (such as a limit on acquiring more than 10% of the debt securities of a single issuing body), but have had their opportunity to invest in issuance further hampered by an inability to access high quality non-EU securitisation markets. These secondary effects suggest that some of the post-GFC regulatory changes in Europe have gone too far, stifling the market, impeding liquidity, and limiting investment and credit diversification opportunities for European institutional investors.

In this Viewpoint, we highlight specific aspects of post-GFC EU regulation that we believe have gone above and beyond what was necessary to strengthen the underlying quality of the European securitisation market and have therefore restricted investment opportunities. We also describe specific changes to regulation that could uphold quality and help grow the EU securitisation market.

BENEFITS FOR THE WIDER ECONOMY AND INVESTORS

Securitisations provide an opportunity for banks to transfer the credit risk of their assets to other investors, freeing up bank capital for lending to consumers and corporate borrowers. By broadening banks’ capacity to lend, securitisations act as an important credit channel, providing borrowers with competitive rates while spurring economic growth. Further, the underlying loans in a securitisation are often in the consumer credit space, thereby providing additional diversification for investors who would otherwise be predominantly exposed to corporate credit risk.

Securitisation deals are commonly sold in tranches, offering varying degrees of credit risk and return and facilitating a more efficient transfer of risk. This means that more risk-averse, high-quality-focused market participants have the opportunity to invest in loss-remote but lower-returning senior tranches, while more opportunistic and sophisticated investors have the opportunity to invest in higher-returning, first-loss, and subordinated tranches.

REGULATORY CHANGES FOLLOWING THE GFC

Prior to the GFC, the simple but overly bank-centric securitisation model had obvious shortcomings. For example, the complete transfer of risk from bank to investor created an incentive for banks to make riskier loans, which led to lower-quality, predatory loan practices, as well as poor loan-level diversification and significant overuse of leverage.

Figure 2: US and European investment grade (IG) securitised credit defaults

Figure 2: The graph shows the default rates per year of securitizations in the US and Europe between 2007 and 2023. While defaults peaked in 2008 at 3.5% and 0.5% for the US and Europe, respectively, defaults have been low (in most cases 0% per year) across both market in the years after the financial crisis.
Source: S&P as of 31 December 2023.

Post-GFC regulations have reconfigured the incentive structure. They have limited the practice of writing predatory loans, compelled banks to hold some amount of exposure to their securitisations, and halted the practice of layering securitisations to create excessive economic leverage in the market. This has resulted in a dramatic increase in the quality of underlying loans, a decline in US and EU defaults, and a stronger overall banking system (see Figure 2).

While the US and EU adopted these measures in the aftermath of the GFC – and have enjoyed similar levels of bank and securitisation quality since then – the US has continued to see a resurgence in securitisation issuance levels, while EU securitisation issuances have remained relatively low (see Figure 1).

That low issuance in the EU is not due merely to a lack of mortgages originated: If we examine the amount of residential mortgage-backed securities (RMBS) issuance as a percentage of new mortgage originations in the EU, we see a similar decline post-GFC (see Figure 3). We believe additional regulatory measures (in particular, a requirement for the EU originator, sponsor, or issuer of a securitisation to make available to investors detailed and prescriptive information on the underlying exposures of the securitisation, known as the EU Transparency Requirements) have made a significant contribution to the reduction in securitisation issuances in the EU.

Figure 3: Percentage of eurozone mortgages that are securitised has declined since the GFC

Figure 3: The graph shows the percentage of Eurozone mortgages that are securitized. Prior to the financial crisis, roughly 50% of mortgages entered the securitisation market, while after the financial crisis, banks have been less incentivized to securitise their assets, dropping to less than 10% on average in recent years. The lack of demand to securitize from banks contributes to the low overall securitization issuance mentioned in Figure 1.
Source: European Mortgage Federation Hypostat, European Mortgage Federation National Experts, European Central Bank, National Central Banks, J.P. Morgan as of 31 December 2023. * Data is preliminary.

Moreover, the EU regulatory requirements are broadly dual-sided. For example, not only do EU originators, sponsors, and issuers of a securitisation need to comply with the EU Transparency Requirements, but EU institutional investors (including UCITS funds and pension funds) need to ensure compliance with these requirements too. However, significant challenges arise when an EU institutional investor wants to invest in a third country securitisation, i.e. a securitization where none of the origination, sponsor, or issuer are EU entities. In this scenario, investors must ensure they receive information that complies with the EU Transparency Requirements – despite those originators having no regulatory obligation to adhere to such requirements in their local jurisdictions. Typically, non-EU originators, sponsors, and issuers do not voluntarily provide information that complies with the EU Transparency Requirements. As a result, EU institutional investors are effectively prohibited from investing in these non-EU securitisations, putting them at a disadvantage versus their US peers.

The effects of the EU Securitisation Regulations have a particularly unfortunate adverse impact on individual investors. Such investors tend to gain market exposure through UCITS funds, which offer daily liquidity and efficient access to a diversified portfolio of assets. Even before the GFC, the UCITS rules prohibiting the acquisition of more than 10% of the debt securities of a single issuing body limited the ability of UCITS funds to effectively invest in securitisations. While this exposure limit applies to both corporate credit and securitisations alike, the two are not directly comparable. This is because securitisations tend to be significantly smaller, limiting the ability for UCITS to gain adequate exposure to an issue, despite the inherent diversification embedded in a securitisation. Further, the amortisation structure of a securitisation (compared with the bullet maturity structure of a typical corporate bond) means securitisation positions are shrinking, exacerbating these sizing constraints. This can lead to undersize positions in portfolios.

It also means that fund managers are typically forced to focus on newer, less attractive issues with larger deal sizes, instead of older, smaller issues that typically have more loan seasoning and thus more attractive cash flow profiles. In addition, the goal of this rule – to prevent a UCITS fund having too much exposure to a single issuer – is counterproductive given the structure of securitisations themselves, which, by their nature, are fully secured by diversified pools of underlying loans. The post-GFC regulatory environment has been burdensome for EU-compliant issuance. When combined with the existing limitation on deal exposure for UCITS funds, this means individual investors are frequently underexposed to high quality, seasoned collateral via securitisations, and overexposed to corporate credit risk in their “diversified” bond funds.

WHAT EU LEGISLATORS AND REGULATORS CAN DO TO INCREASE OPPORTUNITIES WHILE MAINTAINING QUALITY

PIMCO has been an investor in securitisations for more than 50 years, and we have proved time and again our ability to navigate the complexities of these markets to provide opportunities for our clients, including millions of fund investors globally. This extensive and successful experience investing in securitised asset classes leads us to conclude that the current implementation of the EU Transparency Requirements unnecessarily penalises the many pensioners and other ordinary investors in UCITS funds, by depriving them of additional sources of returns and diversification. We believe that reform of the EU Transparency Requirements, in particular as they apply to non-EU securitisations, and alignment of the 10% issuer UCITS rule to the principles regulators seek to achieve, would expand opportunities for UCITS to produce higher returns for their investors, without raising UCITS’ risk profile.

To the extent that one purpose of the EU Transparency Requirements was to foster development of the EU securitisation market, that hasn’t been the result. History has shown that third country originators accessing the EU securitisation market has not evolved – and is unlikely to evolve – in a way that facilitates full compliance with the EU rules. The requirements have not only hindered banks and other participants in the EU securitisation market, they have negatively affected UCITS investors relative to investors in similar funds in other jurisdictions.

In this regard, we suggest that the EU recognise the robustness of the risk retention standards of securitisations issued in countries outside of the EU, together with a principles-based approach to the EU Transparency Requirements. The European Securities and Markets Authority (ESMA) is currently considering the responses to its recent consultation on the disclosure templates relating to the specific information and details of securitisation transactions that are required to be available. This represents an important opportunity to streamline and simplify the current prohibitively strict disclosure requirements applying to investment in non-EU securitisations. We would encourage ESMA to do so, and to modify aspects of the current requirements that have had adverse effects on EU investors and securitisation markets.

Download PDF

Featured Participants

Disclosures

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, via Turati nn. 25/27 (angolo via Cavalieri n. 4), 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a crossborder discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 015 . The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | Note to Readers in Colombia: This document is provided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta de los negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil: PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This document may be provided through the representative office of PIMCO Global Advisors LLC AVENIDA CORRIENTES, 299, Buenos Aires, Argentina. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2024, PIMCO.

CMR2024-0402-3485370

Tell us a little about you to help us personalize the site to your needs.

Terms and Conditions

Please read and acknowledge the following terms and conditions:
{{!-- Populated by JSON --}}
Select Your Location

Americas

Europe, Middle East & Africa