Abstract :
- In June 2025, the European Commission relaunched securitization to finance the ecological and digital transitions, fifteen years after the subprime crisis that had discredited this instrument.
- Prior to this, the European regulatory framework had radically secured securitization via the STS (Simple, Transparent, Standardized) label in 2019: asset homogeneity, prohibition of re-securitizations, mandatory retention of 5% of the risk, and preferential prudential treatment. The data confirms its effectiveness: default rates 0.77 points lower, increased resilience to economic shocks.
- The EU Council agreement of December 19, 2025 marks a decisive step forward by facilitating access to the STS label for SME loan portfolios, thereby removing a major regulatory obstacle to the financing of small and medium-sized enterprises.
- Despite this robust framework, the market remains atrophied (€245 billion in 2024, an amount that represents only 15.7% of that of the United States), revealing structural obstacles that our second note will analyze.
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On June 17, 2025, the European Commission proposed new measures to boost the European securitization market. This move took another historic step forward on December 19, 2025, when the Council of the European Union (EU) ruled to implement this revival and simplification of the securitization market in the EU.
This initiative is part of the broader Savings and Investment Union (SIU) framework, unveiled on March 19, which aims to mobilize private capital to finance the ecological and technological transitions. These needs, estimated at several hundred billion euros annually in the Draghi report [1], cannot be met by public budgets or traditional bank credit alone. Securitization, presented as a tool for diversifying sources of financing, is thus making a comeback on the European political agenda after fifteen years of regulatory scrutiny.
However, this return to favor raises questions. Securitization, a mechanism that transforms bank loans into negotiable securities, has long been associated with the excesses that led to the subprime crisis of 2008. Nearly twenty years later, the market remains deeply atrophied: in 2024, European issuances reached €244.9 billion, barely 35% of the 2008 peak (€700 billion) and a fraction of US volumes (15.7%).
Yet the stakes are considerable. The Banque de France estimates that €620 billion in additional annual investment will be needed to finance the ecological transition by 2030. Faced with these challenges, securitization is presented as a lever for reallocating bank capital and diversifying sources of financing for the real economy.
This article first explains the securitization mechanism before analyzing how the European regulatory framework has radically « secured » it since 2008.
1) Understanding securitization
Securitization [2] involves structuring financial securities to transfer credit risk.
Why would a bank seek to transfer this risk? There are three main reasons for doing so:
- Optimizing regulatory capital: by selling or transferring credit risk, the bank reduces its risk-weighted assets (RWA) and frees up capital that can be reallocated to new loans.
- To diversify its sources of funding: rather than financing its entire loan portfolio through deposits or borrowings, the bank mobilizes institutional investors’ savings through the securities it issues.
- Manage concentration risk: by selling part of its exposures, particularly in certain sectors or geographical areas, the bank reduces its vulnerability in the event of a localized shock.
In concrete terms, a bank sells a portfolio of receivables (real estate loans, consumer loans, auto loans) to an external entity (Special Purpose Vehicle, SPV [3]), which in return issues financial securities sold to investors.
These securities are structured by the SPV into tranches ranked according to their level of risk: senior tranches are the safest, as they consist mainly of securities with a higher rating, i.e., a very low probability of default. In the event of a loss, linked for example to a default on the « underlying » receivables (i.e., the initial receivables acquired by the SPV), senior tranches are paid first and, in principle, only incur losses as a last resort, while mezzanine tranches (securities with a generally lower rating, between BBB and B) and, above all, equity tranches (securities with a low rating or even unrated) bear the initial losses.
This structure makes it possible to create products tailored to different investor profiles, with some seeking security (interest in senior tranche securities, which are lower risk and therefore offer lower returns) and others with a greater appetite for risk (in exchange for higher returns, which leads them to mezzanine and equity tranches).
To illustrate how this works, let’s consider a €100 million portfolio segmented into three levels. Investors exposed to the senior tranche (€80 million, rated AAA) are repaid first and enjoy maximum protection. Below that, the mezzanine tranche (€15 million, BBB) corresponds to intermediate exposure. Finally, the equity tranche (€5 million, unrated) is directly exposed in the event of losses. In a scenario where €10 million of « underlying » loans default, the equity tranche would be completely wiped out and the mezzanine tranche would lose a third of its value, while the senior tranche would remain intact. It is this « over-collateralization » by the subordinated tranches that allows the highest tranches to maintain an excellent rating, even with underlying assets of average quality.
There are two methods of « transferring » loan portfolios, depending on the institution’s strategy. Traditional securitization (true sale) involves a definitive legal transfer of the loans to the SPV. In this case, a bank permanently removes its loan portfolio from its balance sheet. Synthetic securitization, on the other hand, keeps the assets on the bank’s balance sheet: only the credit risk is transferred via credit derivatives or financial guarantees. This method is particularly strategic for SME financing because it allows banks to optimize their regulatory capital while preserving their commercial relationship with customers.
However, SME financing via securitization has so far faced a significant regulatory obstacle. As we will see in the next section, the STS label imposes a strict requirement for homogeneity: securitized receivables must be of the same type (residential real estate loans, auto loans, etc.). However, SME loan portfolios are inherently heterogeneous: they combine equipment financing, cash loans, and commercial real estate loans with varying maturities and guarantees. This diversity, which is intrinsic to small business financing, made it difficult to obtain the STS label and thus preferential prudential treatment.
The EU Council agreement of December 19, 2025 provides a pragmatic solution to this dilemma. The new framework introduces crucial flexibility: a portfolio is now considered homogeneous, and therefore eligible for the STS label, as long as it consists of at least 70% SME loans, even if these loans are of different types. In concrete terms, a bank can now securitize a portfolio comprising 40% equipment loans, 25% credit lines, and 35% commercial real estate loans, and obtain the STS label if the portfolio as a whole represents at least 70% SMEs. This development removes a major obstacle: it allows banks to free up regulatory capital on their SME exposures while maintaining customer relationships, thereby aligning financial instruments with the economic reality of small business financing.
Through these mechanisms, banks are transitioning to an » originate-to-distribute » model: rather than holding loans until maturity ( » originate-to-hold » model), they grant them with the aim of quickly distributing them to investors via securitization. By no longer retaining all the risks on their balance sheets, they free up significant capital, enabling them to continuously recycle their capital to finance new credit cycles for the benefit of the real economy.
However, this model presents a major structural risk: the misalignment of interests between lenders and investors. When a bank knows that it will quickly sell a loan through securitization, it may be tempted to relax its lending criteria. The objective then becomes to maximize the volume of loans originated rather than their quality, since the risk of default will be transferred to the final investors. This mechanism directly fueled the subprime crisis: banks massively granted real estate loans to borrowers with low creditworthiness, knowing that these loans would be immediately securitized and sold. Investors, for their part, relied on AAA ratings without checking the actual quality of the underlying assets, creating a chain of risk delegation that collapsed in 2008.
2) Why 2025 is not 2008: the STS factor
The 2008 crisis revealed the consequences of misjudging the risk associated with certain financial securities, particularly due to a lack of transparency or simplicity. The practices that led to the collapse are now well documented [4]: securitization of poor-quality loans (subprime mortgages), opaque structures with cascading re-securitization (CDOs of CDOs), lack of incentive for banks to verify the quality of the assets sold, and endemic conflicts of interest among rating agencies.
The European Securitization Regulation, which came into force in 2019, created the STS (Simple, Transparent, Standardized) label to correct these abuses. This framework imposes strict discipline at several levels. First, the homogeneity of the underlying assets: an STS portfolio can only contain exposures of the same type. A residential mortgage securitization vehicle cannot include commercial loans or corporate debt, eliminating the opaque mixes that characterized pre-crisis products. Second, re-securitizations are formally prohibited. An STS security cannot be backed by other securitization securities, eliminating the cascading arrangements that amplified systemic risk.
The regulation also introduces mandatory risk retention: the credit originator (or the bank that originated the loan), also known as the sponsor, must retain at least 5% of the exposure, generally in the form of an equity tranche or horizontal participation [5]. This risk participation realigns the interests of investors and originators by preventing banks from granting poor-quality loans for the sole purpose of selling them quickly (the « originate-to-distribute » model) and thus forces banks to maintain high quality standards in lending. At the same time, institutional investors are subject to enhanced due diligence requirements, including verification of the quality of the receivables, the robustness of the servicer (the entity managing the collection) [6], and the transparency of the structure. Finally, the CRA (Credit Rating Agencies) regulation strictly regulates rating agencies to limit conflicts of interest and improve their methodology.
These safeguards have produced tangible results. On the European residential mortgage securitization market between 2013 and 2021, mortgage securitizations meeting STS criteria had annual default rates 0.77 percentage points [7] lower than those of traditional securitizations and proved more resilient to adverse macroeconomic shocks. However, this regulatory rigor comes at a cost: it complicates structuring and limits the eligibility of certain portfolios for the STS label.
Beyond the STS framework, the reform of the Capital Requirements Regulation (CRR) has transformed the prudential treatment of securitization. Prior to the reform, securitization exposures carried risk weights ranging from 100% to 250%, or even 1,250% for the riskiest tranches, making them extremely capital-intensive for banks to hold. With the STS label, the risk weights for senior tranches can be reduced to 10% for high-quality RMBS (Residential Mortgage-Backed Securities) and between 15% and 25% for ABS (Asset Backed Securities, securities backed by non-real estate loans, unlike MBS which are backed by mortgages) [8] depending on the rating and maturity.
This reduction in capital requirements radically changes the economic equation, but only for the least risky assets eligible for the STS label. Non-compliant loans remain subject to standard weightings, and banks are exposed to the risk of reclassification in the event of a deterioration in the portfolio, which can quickly increase capital requirements.
Nevertheless, this technical improvement is not enough to significantly revive the European market: constraints remain high and the regulatory framework demanding. Despite the introduction of the STS framework, securitization volumes remain well below pre-crisis levels and far below US standards, suggesting that the obstacles are not only regulatory or prudential, but structural.
Conclusion
The European regulatory framework has succeeded in transforming securitization into a more secure instrument. The STS label, with its strict requirements for homogeneity, transparency, and risk retention, has learned the lessons of 2008. Empirical data confirm that these products work: STS securitizations perform better and are more resilient than their traditional counterparts. The CRR reform has also improved economic attractiveness for banks by drastically reducing capital requirements on high-quality senior tranches. On paper, all the ingredients seem to be in place for a revival.
However, the market is not taking off. Six years after the introduction of the STS label, European issuance is less than half of 2008 levels and remains marginal compared to the United States. This asymmetry cannot be explained by a lack of product safety, but by deep structural barriers. What are these obstacles? Why are European institutional investors staying away? Why can’t Europe replicate the American model?
A second note analyzes the intrinsic limitations of the European securitization model, market fragmentation, the cultural reluctance of institutional investors, and the real economic challenges of this recovery in the face of the massive financing needs of the ecological transition.
Léo NICOLAU ( article written on 12/23/2025)
FOOTNOTES / SOURCES
[1] Mario Draghi, ‘The Future of European Competitiveness’, 2024
[2] For a detailed presentation, see: BSI Economics (2019), Securitization: Issues and Mechanisms, https://www.bsi-economics.org/images/articles/a225.pdf; BSI Economics (2017), Solvency II, securitization, and financing of the French economy, https://bsi-economics.org/solvabilite-2-titrisation-et-financement-de-leconomie-francaise-2-2/
[3] The SPV is a separate legal entity, isolated from the risk of bankruptcy of the originating bank. This separation ensures that the securitized receivables are not affected by any financial difficulties experienced by the bank.
[4] See in particular: Patrick Artus, Jean-Paul Betbèze, Christian de Boissieu, and Gunther Capelle-Blancard, « La crise des subprimes » (The Subprime Crisis), Report of the Economic Analysis Council, October 2008; Jacques de Larosière, « Report of the High-Level Group on Financial Supervision in the EU, » European Commission, February 2009.
[5] Horizontal participation consists of the originator of the credit retaining the same fraction of all tranches issued, which exposes it proportionally to the total risk of the structure.
[6] The servicer is the entity responsible for managing securitized loans: collecting repayments, monitoring late payments, implementing collection procedures, and transmitting information to the securitization vehicle and investors.
[7] Billio, M., Dufour, A., Segato, S., & Varotto, S. (2023). « Complexity and the default risk of mo
[7] Billio, M., Dufour, A., Segato, S., & Varotto, S. (2023). « Complexity and the default risk of mortgage-backed securities, » Journal of Banking & Finance, 155, 106993.
[8] Regulation (EU) 2017/2401 of the European Parliament and of the Council (amendment to the CRR), Articles 254-267, in particular Article 260 for preferential weightings for STS securitizations.
