Promoting synthetic securitisation will only increase financial systemic risk with no benefit to the economy

Finance Watch warns the European Banking Authority that creating a so-called Simple Transparent Standardised (STS) framework for synthetic securitisation would spread complex and unsupervised risks in the market whilst allowing to circumvent capital requirements regulation.

Brussels, 26 November 2019 – In its response to the European Banking Authority’s consultation, the public interest association Finance Watch warns policymakers that an STS framework for synthetic securitisation would be a step toward recreating the conditions that made possible the last financial crisis.

Synthetic securitisation transactions are by nature bespoke, complex and not transparent: Contrary to ordinary securitisation transactions, the assets are not loans but derivative contracts offering the originator of the transaction a credit protection in exchange for remuneration paid to investors. Those credit protections are complex both legally and financially and they are impossible to monitor in real time by supervisors. Moreover, the benefit to the economy and to SME financing is non-existent, witness the fact that the banks most active in SME lending do not structure synthetic securitisation transactions today, or very marginally. Synthetic securitisation is a factor of acceleration and amplification of financial crises, exactly what happened during the last financial crisis, and making those transactions easier would therefore weaken financial stability.

Thierry Philipponnat, Head of Research and Advocacy at Finance Watch, said:

“Simple Transparent Standardised (STS) synthetic securitisation is a contradiction in terms as synthetic securitisation is always complex, bespoke and never standardised. 

“Policymakers would take responsibility by allowing STS synthetic securitisation as they would recreate the conditions that made possible the crisis of 2007 – 2009.

“Promoting an STS synthetic securitisation seems to have as its only motive to circumvent banks capital requirements rules such as Basel III.”

The EBA discussion paper suggests that banks could use synthetic securitisation for arbitraging capital requirement regulation coming, among others, from the Basel III framework, the introduction of the output floor, IFRS 9 and the fundamental review of the trading book (see § 32, page 18). In other words, circumventing regulation is an essential motive for promoting STS synthetic securitisation.

By construction, if STS synthetic securitisation enables market participants to roll out transactions with a similar, and even an increased level of risk given their additional levels of complexity and credit risk, with less prudential constraints, it will lead to higher financial systemic risk.


For further information, please contact:

Charlotte Geiger, Senior Communications Officer, at, +32 (0)2 880 0441 or +32 (0)474331031


Whereas originally the STS securitisation framework, adopted through the Regulation 2017/2402 in December 2017, excluded synthetic securitisations, a specific provision opened the door to a future inclusion of synthetic securitisation under pressure from financial lobbyists.

Under article 45 on “Synthetic securitisations”, EU policymakers delegated specific responsibilities to the European Banking Authority, who had to publish by 2 July 2019, in close cooperation with ESMA and EIOPA, a discussion paper on the feasibility of a specific framework for simple, transparent and standardised synthetic securitisation, limited to balance-sheet synthetic securitisation.

The EBA launched a 2-month public consultation on its proposal, ending on 25 November 2019.

By 2 January 2020, the European Commission will, on the basis of this EBA report, submit a report on the creation of a specific framework for simple, transparent and standardised synthetic securitisation, limited to balance-sheet synthetic securitisation, together with a legislative proposal, if appropriate.

Finance Watch alerts since the beginning about the risks of reviving securitisation, and recommended to exclude synthetics and to promote only the securitisations that DO finance the real economy and not those that by their complexity can only amplify market cycles.

Further Finance Watch publications on the topic:

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