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The writer is the chief executive of Pimco
Europe needs capital and plenty of it. By some estimates, its annual funding needs will top €1tn a year from now until 2030, leaving a large gap between its spending plans and how much it raises in revenue.
Government finances are stretched, and banks can’t bridge that gap alone. They already represent 85 per cent of Europe’s corporate lending. There is broad agreement — from Mario Draghi to Enrico Letta to the European Commission itself — that only by deepening its capital markets can Europe reduce the burden on banks, meet its funding needs, and grow. But how? There have been encouraging signs but a key source of capital — securitisations — falls short.
The Commission unveiled the Savings and Investments Union (SIU) last year to address this problem. However, its subsequent proposals on securitisation are not ambitious enough. Europe risks approving a package that delivers baby steps, not the bolder strides needed to meet its financing needs.
Securitisation allows banks to pool loans — like mortgages, car loans or financing for local businesses — and sell them to investors as bonds. Offloading them gives these banks more flexibility to lend more money to more households and small businesses. Securitisations also benefit European savers and retirees, providing diversification and stable income even during downturns.
The US securitised fixed income market, for instance, has outperformed high-quality corporate bonds through the five most recent periods of stress since 2015. Liquidity for securitisations has also become more robust and is now becoming more comparable to corporate credit liquidity.
Securitisations deservedly earned a bad reputation after the 2008 financial crisis. But the culprit was poor underwriting and low-quality loans, not the concept itself. Since then, meaningful reforms have strengthened loan underwriting, requiring banks to own some of their securitisations and improving transparency for investors.
In addition, much of this credit is higher quality, such as triple-A rated and investment grade. Collectively, these reforms have resulted in very low (near 0 per cent) defaults in Europe and the US over the past 15 years.
Despite all these benefits, the securitisation market in Europe remains moribund, comprising around 0.3 per cent of GDP compared with 4 per cent in the US.
This divergence reflects regulatory choices Europe can now revisit.
Large European funds known as Ucits are prevented from investing in securitisations at scale. They want to, but a rule from 1985 prevents these mutual funds from buying more than 10 per cent of the bonds of any issuer. While well intended at the time — it was designed to prevent Ucits from exerting corporate control — it has ended up hurting this market. European securitisations, which did not exist when the rule was designed, are not involved in corporate skirmishes, so the rule is both outdated and ineffective.
This cap is a major obstacle to larger Ucits, particularly given how small European securitisation deals tend to be. Ucits are the only investors with this kind of limit. Banks, pension funds and life insurance companies, whose direct stakeholders are also retail investors, have no equivalent restriction.
As part of the SIU, the European parliament has proposed raising the cap to 20 per cent, though the Commission appears decidedly lukewarm even on this. Again, these are baby steps and not sufficiently ambitious to meet the moment Europe faces. European Ucits are already significantly underinvested in securitisations, which often only account for single-digit percentages of funds, compared with the US market, where the equivalent funds have no limit and are roughly 40 per cent invested in securitisations.
Removing the cap for securitisations could unlock around €150bn in pent-up demand from asset managers and an estimated €30bn annually thereafter. If, however, the 20 per cent cap is pursued, the market may only grow by an additional €20bn, representing only 2 per cent of the €1tn funding needs.
Amending this misplaced cap — while keeping existing protections in Ucits funds for concentration, liquidity and credit quality — would allow the European securitisation market to grow significantly and safely.
If policymakers seize this moment, securitisations can play a meaningful role in bridging Europe’s funding gap. Equally important: they would deepen its capital markets, diversify its funding sources, reduce systemic risk and help European businesses, savers and retirees. Without this action, Europe’s lagging growth relative to the US will remain, or even worse, widen.
