Securitisation typically involves the pooling and repackaging of loans or other assets, such as mortgages, leases or credit card receivables, and the conversion of them into debt securities. The repackaged assets are put together into portfolios and sold to special purpose companies, which fund the acquisition by issuing debt securities to investors. The investors then receive a regular cash flow from the underlying assets.
Securitisation allows banks to transfer the risk of some exposures and use the capital they set aside to cover for that risk to generate new lending to households and small businesses, the Commission said.
EU rules on securitisation were introduced following the financial crisis of 2008. The latest proposals aim to "re-establish a safe securitisation market in Europe by differentiating simple, transparent and standardised securitisation products from more opaque and complex ones", the Commission said.
Criteria have been set out to identify these STS securitisations, and new regulations will cover due diligence, risk retention and transparency rules for securitisation products, the Commission said.
The regulation on capital requirements will be changed to make the capital treatment of securitisations for banks and investment firms "more risk-sensitive and able to properly reflect the specific features of STS securitisations", the Commission said.
Risk retention requirements for originator lenders are to remain unchanged at the current minimum of 5%.
The deal is one of the cornerstones of the EU's Capital Markets Union plan and will broaden opportunities for investors, the Commission said.
The package could unlock up to €150 billion of additional funding to the economy and will provide new investment opportunities for institutional investors such as pension funds and insurance companies, the Commission said.
Securitisation expert Edward Sunderland of Pinsent Masons, the law firm behind Out-Law.com said: "The announcement by the Commission is very welcome, as the European securitisation markets have still to recover from their peak 10 years ago. The proposal to limit the risk retention to 5% is positive, while the intention to consolidate capital requirements legislation into one place will simplify regulatory compliance across the financial sector."
Valdis Dombrovskis, vice-president responsible for financial stability, financial services and CMU, said: "This agreement marks another big step towards the creation of a Capital Markets Union. It will help build a sound and safe securitisation market in the EU, bringing real benefits to investment, jobs and growth. It will free up bank lending so that more financing can go towards supporting our companies and households."
The CMU is being developed to help businesses across all EU member states tap into sources of funding and is due to be in place by 2019.