BRUSSELS — EU capitals are on the verge of agreeing on measures to loosen safeguards around a financial practice that contributed to the 2008 crisis, multiple officials involved in the talks told POLITICO.
Treasury officials in the Council have already agreed to lower the amount of cash that finance firms need to hold when they invest in resold debt, known as “securitization.” Only a few technical details remain before the Council can unveil its negotiating position in the coming weeks, paving the way for final negotiations with MEPs next year.
Securitization is when banks repackage and resell debt, famously explained by actress Margot Robbie in a bubble bath in the film “The Big Short.” The engineering allows banks to move some assets off their balance sheets, giving them more space to extend new loans.
The EU’s securitization market collapsed after the financial crisis and remained undersized, in part due to stringent requirements imposed by lawmakers. The market took off again in the U.S., but not in the EU, despite a Commission bid to revive it.
The Commission proposed looser rules for the practice in June, which EU governments are set to endorse despite warnings from the European Central Bank not to relax them too much.
The European Parliament still needs to set out its position, which MEPs expect to agree on in the spring. Then, the final legislative negotiations can begin.
Lowering the floor
A key element governments have agreed on concerns “risk weight floors,” which factor into the calculation of the minimum amount of cash banks must hold as a safety measure when they invest.
The “floor” is for investments in the safest type of securitization, with the idea that the riskier the investment, the more cash banks need to hold in reserve.
Before the financial crisis, this “floor” was set at 7 percent. After the crisis, the EU raised it to 10 or 15 percent, depending on the safety of the resold debt. In its June proposal, the Commission tabled a flexible minimum that depends on the investment’s risk, but it could not fall below 5 percent for the least risky investments.
Governments have now agreed to a 6 percent floor. But a group of countries led by France pushed for a 2-3 percent floor in negotiations and was overruled, according to the same officials.
The ECB has warned against loosening the minimum too much. In an opinion, the ECB said it’s “sceptical” about the flexible floors concept, arguing that it “could lead in practice to very low risk weights” for some investments, “well below the 7 % floor that was applicable before the global financial crisis.”
The ECB recommended a fixed 7 percent floor for the safest transactions, as well as other tweaks to ensure banks don’t take on other activities purely to benefit from the reduced capital buffers.
