Securitisation is a core feature of capital markets. It provides a mechanism by which illiquid loans originated by banks and finance companies are transferred to capital market investors. A reformed securitisation framework will help reduce the EU’s over-reliance on bank funding, while preserving the financing of the European economy. The UK is also consulting currently on potential reforms to its securitisation requirements.
Non-performing loans (NPLs) are loans where the borrower is unable to make the scheduled payments to cover interest or capital reimbursements. In light of the economic impact of the ongoing COVID-19 pandemic, the volume of NPLs in Europe is likely to grow significantly. High levels of NPLs on banks balance sheets restrict their ability to issue new capital to businesses. A well-functioning secondary market for NPLs would serve to mitigate this outcome.