Introduction
The term “on-balance-sheet securitisations” has been coined to denote the type of transaction that was heretofore referred to as “synthetic securitisations”. This risk transfer method, used by banks, has a troubled history. The transfer of risk through complex structured finance transactions and the utilisation of credit default swaps was identified as a primary contributing factor to the financial crisis of 2007/2008. Historically, such transactions have been subject to a degree of socio-political taboo. However, a major shift in this paradigm occurred with the advent of a comprehensive European policy reform initiative, aimed at streamlining the regulatory framework governing on-balance-sheet (OBS) transactions.
Regulatory Framework
The first regulatory initiative to accommodate the markets for on-balance sheet securitisations concerned the introduction of STS-eligibility in 2021 by major amendments to the Securitisation Regulation. Along with these changes, CRR was amended to introduce more risk-sensitive capital requirements for on-balance sheet STS securitisations. In the Securitisation Package of June 2025, further relief measures are proposed. This includes the changes to the Significant Risk Transfer process and introduction of a principles-based approach to replace the mechanical tests. The SRT approval process is to be made uniform by inclusion of the process in CRR.
Purpose of the changes in regulation
The overarching motivation behind the ongoing regulatory changes is to stimulate the securitisation markets in order to achieve greater participation by banks in the financing of the real economy. The strongest impetus in this regard came during the period when the COVID-19 pandemic was raging in Europe. However, even in the aftermath, the primary objective appears to be stimulating the financing markets for the business sector.
Impact for the industry
Whereas, prior to the 2007–2008 financial crisis, securitisations primarily served to help banks diversify their funding strategies – largely based on the ‘originate-to-distribute’ model, which also played a role in Europe – subsequent developments have focused mainly on creating an effective framework to provide banks with instruments for capital relief. Funding strategies at many banks have shifted towards the use of covered bonds as a key instrument; however, particularly following the introduction of the new rules (Capital Floors), the use of securitisation as a risk transfer technique is on the rise. Regulators, including the ECB, are promoting the use of this toolkit and aim to simplify approval procedures in this area (for example, SRT routines)
