Regulating scale rather than structure? Securitisation and covered bonds in Europe

Regulations for securitisation have been subject to widespread criticism both before and after the Global Financial Crisis (GFC). Before the crisis, they were criticised for creating perverse incentives for banks and, after the crisis, they were criticised for imposing relatively stringent treatment on the securitisation market. Covered Bonds share many similarities with asset-backed securities, yet they continue to receive relatively favourable treatment in regulations. This asymmetric treatment has given rise to significant concerns among market participants. The present study reviews the post-crisis regulatory framework and highlights that many of these regulations may not always be proportionate or effective in addressing the problems associated with securitisation. It argues that securitisation per se may not be the source of these problems; rather, the scale of securitisation activity represents an important dimension of prudential risk along with the structural characteristics. Accordingly, the article introduces the concept of incremental regulation and links prudential regulation to the scale and characteristics of securitisation activity undertaken by a bank. The article also addresses concerns regarding the asymmetric treatment of securitisation relative to covered bonds in the European market. It concludes that regulators should adopt a more proportionate framework that constrains excessive securitisation while supporting the development of high-quality securitisation markets.