The European Commission plans to relax regulations on securitization—a process that contributed to the 2008 global financial crisis. The European Central Bank (ECB) is warning of potential dangers linked to this move, pointing to the risk of new speculative bubbles and hidden risks in bank balance sheets.
The European Commission argues that reviving the securitization market will help banks issue more loans, thereby boosting economic growth in the European Union. The new rules aim to reduce capital reserve restrictions on bank lending and ease verification and reporting requirements. The EC assures that adequate safeguards will remain in place to prevent a repeat of the 2008 crisis.
However, the ECB has raised serious concerns. The central bank recalls lessons from the financial crisis when complex and opaque securitization led to excessive risk-taking. The ECB urges the European Commission to ensure that securitization does not become a tool for fueling speculative bubbles or hiding risks in bank balance sheets.
The organization Finance Watch has also criticized the EC’s plan, arguing that securitization will not direct capital where it is most needed but will instead serve regulatory purposes or increase shareholder profits. While the securitization market in the U.S. has grown since 2008, the European market has shrunk, prompting the EC to label securitization as an “underutilized tool” in Europe.