Strengthening the Securitisation Blueprint: The Missing Piece in the EC’s Securitisation Reform

In the last blog in this series on the EU securitisation reform, we focus on what is missing in the European Commission’s (EC) proposals: improvements to the blueprint of high-quality securitisation. Just as the integrity of any bridge rests on its sound construction and adherence to best-practice engineering standards, so too is the long-term sustainability of the securitisation market strengthened through the Simple, Transparent and Standardised (STS) criteria that protect investors and underpin trust. The STS standards serve as the blueprint ensuring that securitisation is both safe and resilient.  

As a pension fund investor with an inherently long-term horizon, PGGM has always supported and advocated for a high-quality STS standard for on-balance-sheet securitisation (which we call Credit Risk Sharing or CRS for short). This first blueprint was not perfect, but it has certainly helped the CRS market to grow rapidly since 2021.  

Yet as we read the Commission’s proposed amendments to the EU Securitisation Regulation (SECR), we could not help but notice a lack of ambition with no substantial changes to the STS blueprint, other than including unfunded protection. This is an overlooked chance to enhance the framework. We will highlight three areas for improvement: 

Firstly, the proposals miss opportunities to support green and digital projects. Currently, banks cannot benefit from STS capital treatment for loans to projects in their pre-operational phase, which hinders investment in vital transitions. The proposed restrictions on certain income-producing real estate (IPRE) loans also lack clear justification. Allowing these types of finance to qualify for the preferential STS capital treatment would help channel capital to initiatives to advance energy-efficient buildings and urban regeneration, supporting the EU’s strategic aims.  

Secondly, the current approach to calculating initial loss is too rigid, requiring the “higher of” provisions and regulatory LGD, to the structural disadvantage of investors and not reflecting true risk. Investors consequently would need to either increase price or require a coupon adjustment mechanism, neither of which serves the principle of simplicity. The solution is simple and is the definition of low hanging fruit: just change “higher of” to “either”, and it’s fixed. 

Finally, current STS standard offers limited options for eligible collateral and permits cash to be held unsecured on the bank’s balance sheet, leaving it vulnerable if the bank defaults. To strengthen the STS standard, the list of acceptable collateral should be expanded to include (reverse) repos, secured deposits, and money market funds, with clear rules on quality.

Policymakers should also consider new ways to remove counterparty risk, such as ring-fenced deposits or placing cash directly with the European Central Bank. These measures would protect the collateral from the bank’s own risks, ensuring it remains readily accessible and safe for all parties involved. 

As highlighted in our first blog in this series, the Commission’s proposals introduce a range of constructive modifications. However, it remains clear that the current securitisation blueprint - the STS standards - leaves essential elements unaddressed. To truly reinforce securitisation and make it genuinely robust, the framework requires targeted enhancements to the STS criteria. Strengthening the STS standards could go hand in hand with any measures to make the framework more flexible elsewhere. This is the only way forward to ensure Europe builds a more secure and responsible securitisation market and continues to attract the institutional capital needed to support the EU’s economic ambitions. 

We call on policymakers to seize this opportunity to plug the gaps in the STS standards and make Europe’s securitisation framework work for the benefit of the EU’s economy.