Proposals For Relaxation of EU Securitization Framework

Background

The current EU securitization framework (set out in Regulation (EU) 2017/2402 (the “Securitization Regulation”), Regulation (EU) 575/2013 (the “CRR”) and corresponding delegated acts) finds its origins in the Global Financial Crisis of 2008, which revealed how securitization (traditionally considered to have a positive impact on financial markets due to its ability to increase liquidity and lending capacity of the banks) may significantly challenge the stability of the financial system when not properly regulated.

To address this risk, the EU introduced stringent rules applicable to transactions falling within the following definition of ‘securitization’ under the Securitization Regulation

“‘securiti[z]ation’ means a transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics:

(a) payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures;

(b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme;

(c) the transaction or scheme does not create exposures which possess all of the characteristics listed in Article 147(8) of [the CRR].”

The parties involved in these transactions must comply with the risk retention, transparency, and due diligence requirements set out in the Securitization Regulation. In addition, the CRR requires the participating banks to hold an increased amount of capital for their securitization exposures.

However, this regime has been criticized on numerous occasions for being overly conservative and hindering the development of the EU securitization markets. Of particular concern are high operational costs for issuers and investors required to comply with the requirements under the Securitization Regulation, and undue prudential barriers for banks and insurers investing in securitizations.

The amendments proposed by the Commission respond to the most recent calls for amendments, such as those included in the report of Mario Draghi (former President of the European Central Bank), who considered the change of the securitization framework an important step towards strengthening the lending capacity of EU banks needed in the context of new EU defense priorities.

RELAXATION PROPOSALS

The proposals are not an overhaul of the regime, but rather a series of targeted amendments aimed at relaxing the existing rules under the Securitization Regulation (without repealing its core elements) and lowering capital requirements for banks involved in securitizations under the CRR.

The main aspects of the proposals are:

• Due Diligence

Currently, prior to investing in a securitization, investors are required to conduct a set of prescribed verifications regarding compliance by the originator, sponsor, or original lender, as relevant, with the Securitization Regulation.

The amendments propose to remove this requirement whenever (i) the sell-side party is established and supervised in the EU, or (ii) multilateral development banks fully guarantee the securitization position. In addition, the requirements will be reduced where the securitization includes a first-loss tranche (representing at least 15% of the nominal value of the securitized exposures) that is guaranteed or held by certain public entities.

• Risk Retention

As of now, the originator, sponsor or original lender, as relevant, is required to retain on an ongoing basis a material net economic interest in the securitization of not less than 5%. The amendments propose to waive this requirement for securitizations guaranteed or held by certain public entities.

• Reporting

Under the current regime, the originator, sponsor or a securitization special purpose vehicle must provide specific information to investors, regulators and, upon request, potential investors. The templates for such reporting are published, but do not differentiate between public and private securitizations. The amendments propose to simplify the existing templates by removing at least 35% of fields and creating a new, lighter template for private securitizations.

The proposals define a ‘public securitization’ as follows:

“a securiti[z]ation that meets any of the following criteria:

(a) a prospectus has to be drawn up for that securiti[z]ation pursuant to Article 3 of Regulation (EU) 2017/1129 [the EU Prospectus Regulation];

(b) the securiti[z]ation is marketed with notes constituting securiti[z]ation positions admitted to trading on a Union trading venue as defined in Article 4(1), point (24) of Directive 2014/65/EU [MiFID II]

(c) the securiti[z]ation is marketed to investors and the terms and conditions are not negotiable among the parties.” (emphasis added)

A ‘private securitization’ is defined as a securitization that does not meet any of the above criteria.

• STS Securitizations

The Securitization Regulation introduced a specific framework for ‘simple, transparent, and standardized’ (“STS”) securitizations, allowing the involved banks to comply with lower capital requirements compared to non-STS securitizations. As of now, for a securitization to qualify as an STS one, 100% of its underlying pool of exposures must consist of loans granted to small and medium-sized enterprises (“SME”). The amendments propose to lower this requirement to 75%, thereby opening the framework to mixed securitizations (with exposure of up to 25% to non-SME loans). 

In addition, the proposals extend the scope of eligibility criteria for credit protections for the STS securitizations to also cover unfunded guarantees issued by certain insurance or reinsurance companies.

• Capital Requirements

Currently, banks must apply specific fixed ‘risk weight floors’ when calculating the capital they are required to hold against their securitization exposures: 10% against the exposure to a senior position of STS securitization, and 15% against the exposure to a senior position of non-STS securitization. The amendments propose to introduce a new concept of a ‘risk-sensitive risk weight floor’ calculated with regard to the riskiness of the underlying pool of exposures. This would allow the concerned banks to apply lower floors than currently required.

Further, the proposals introduce changes to the ‘(p) factor,’ one of the parameters used in the formulae for calculating securitization risk weights. The (p) factor determines an additional amount of capital that banks are required to hold against their securitization positions, compared to the capital they would need to hold if the underlying exposures were not securitized. The current method of calculating this parameter is considered by some market participants to result in arguably excessive and unjustified levels of overcapitalization for certain securitizations. The amendments address this issue by recalibrating the (p) factor, allowing banks to benefit from reduced capital requirements for investments in senior positions, originator/sponsor positions, and STS securitizations. The formulae are also adjusted to neutralize differences between the (p) factor levels calculated under the SEC-IRBA and SEC-SA formula-based approaches. The risk weight tables under the external rating-based approach (SEC-ERBA) would be amended accordingly to reflect these reductions.

Finally, a new concept of ‘resilient securitization positions’ will be introduced, allowing banks involved in low-risk securitizations (regarding agency and model risks, as well as robust loss-absorbing capacity) to benefit from additional reductions in capital requirements.

INSURERS AND UCITS FUNDS

The Commission is currently working on two other proposals. The first of them, expected to be published in the coming weeks, is a set of rules aimed at removing unnecessary prudential costs for insurers investing in securitizations.

The second one, still being considered by the European Commission, would allow retail funds established under Directive 2009/65/EC [the UCITS Directive] to invest more than 10% in a single securitization issuance. However, no details have yet been provided on what the new limits would be.

COMMENT

Relaxation of the existing rules is definitely welcomed by the EU securitization community. Whether these measures will actually provide a second life to EU securitization markets is a more complex question. Back in 2022, the European Supervisory Authorities (comprising the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) stressed that “the impact that may come from the targeted relaxation of the bank capital requirements is […] likely to be relatively small when looking at the securiti[z]ation market as a whole.” Most recently, during the debate at the European Parliament’s Committee on Economic and Monetary Affairs on July 15, 2025, Claudia Buch, the Chair of the European Central Bank’s Supervisory Board, stated that she does “not see how securitization will help […] increase access to equity finance [and] to finance long-term investments.”

In the same vein, the Impact Assessment Report published with the proposals argues that a number of external factors providing EU banks with cheaper funding alternatives might have disincentivized them from engaging in securitizations. Relevant factors mentioned in this context include accommodative monetary policy with easily available central bank funding (up until 2022), stable deposits, and liquid EU covered bond markets. That said, it remains to be seen how the proposals will impact the markets in the current less-favourable macroeconomic context.

What is definitely missing in the published documents is the discussion on non-Securitization Regulation securitizations. The analysis behind the amendments solely focuses on in-scope securitizations (i.e., those involving tranching), 80% of which, according to the European Commission, occur in only 5 EU Member States (France, Germany, Italy, the Netherlands, and Spain), while ignoring a significant and thriving market of non-tranche securitization. In this regard, the Commission seems to overlook a number of bespoke regimes, such as Luxembourg. No proposals have been put forward on how to reconcile, harmonize or, at least, address these co-existing regimes.

What would also be welcomed are clarifications on the ‘sole purpose’ regime (relevant for determining which entity qualifies as an originator for the purposes of the risk retention requirements), particularly in connection with a more flexible equivalent implemented in the UK last year. Without doubt, these proposals clearly mark another step leading to further divergence between the EU and UK regimes (read our alert on the new UK securitization rules here).

TIMING

The proposals now need to pass through the EU legislative process. This will entail review by the European Parliament and the Council of the EU. Multiple modifications and versions of the proposed amendments may be therefore expected. Once the final texts are voted on by both the Council and the Parliament and published in the Official Journal of the EU, an 18-month transition period would usually apply before they fully enter into force.