On September 30, the European Commission launched its action plan to put the building blocks for a Capital Markets Union in place for the EU's 28 Member States by 2019. As part of the action plan, the Commission put forward a proposal for legislation on simple, transparent and standardised securitisation. We spoke to Commissioner Jonathan Hill about the action plan and, in particular, the proposals to build a solid EU-wide securitisation market.

The overriding aim of the Capital Markets Union is to get money moving more freely around Europe and make it easier for companies and individuals to invest their money in new ways. When do you think we might start to see the benefits of the project – not just to investors, but to the economy as a whole?

By 2019, I want our businesses to have a wider variety of funding options at all stages of their growth, wherever they are in Europe. I want investors and consumers to have the confidence to invest and save for the long term, and I want there to be fewer barriers keeping finance locked within Member States. There is no single measure that will deliver a capital markets union, but rather a range of measures that will be significant when taken together. So we are taking some early steps now to get finance moving, including a 30% cut in risk charges for insurers’ infrastructure investments, reducing the cost and length of prospectuses, and relaunching simple, transparent and standardised securitisation. Alongside that, we are also taking action to break down some of the longer-term barriers relating to insolvency, tax and securities law.

How do the proposals for securitisation fit into the overall Capital Markets Union project? And why does the EU securitisation market need to be relaunched?

The overarching aim of the Capital Markets Union is to tackle investment shortages head-on by increasing and broadening the funding sources for Europe’s businesses and long-term projects. When it is soundly structured, securitisation offers an excellent way of diversifying sources of financing. It also makes it possible for banks to transfer some risk to others, for example, to long-term investors. This frees up their balance sheets and allows them to lend more to businesses, including SMEs, in need of funding.

But European securitisation markets have remained sluggish since the beginning of the financial crisis, particularly if we compare them to US securitisation markets: US markets recovered faster than here in the EU, even though they suffered much larger losses during the crisis.

It is not my goal to imitate the US; in this case, as in others, we need European solutions to European problems. But I think there is a very strong case for relaunching securitisations that are simple, transparent and standardised.

There is a certain stigma attached to securitisation. How risky is it in reality?

It is true that securitisation of subprime mortgages in the US was a major contributor to the financial crisis of 2008. As a result, investors lost trust in all securitisation. But it’s important to remember that the problems then were largely limited to US markets. For example, European issuers tended to retain a big part of the portfolio of the loans they packaged in a securitisation. In the US, on the other hand, granting loans and then selling them to third parties became a widespread practice. Overly complex structures such as CDOs and CDOs-squared were also rare in the EU, whilst widespread in the US. In fact, investors in EU securitisations suffered a fraction of the losses experienced by investors in US deals. In the US, the worst performing AAA-rated securitisation products defaulted in 16% of cases at the height of the crisis, whilst their European equivalent defaulted in just 0.1% of cases.

Looking further ahead, what does the Commission hope to achieve with its securitisation proposals?

With these proposals, we want to revive markets in a more sustainable way, so that simple, transparent and standardised securitisation can channel funding to the economy. If we can rebuild the securitisation market to pre-crisis levels, that would amount to an extra 100 billion euros of investment for the economy. We want to allow for efficient and effective risk transfers to a broad set of institutional investors. We want to make it possible for securitisation to work as an effective method of funding for some non-banks, for instance insurance companies, as well as for banks. And of course we want to protect investors and manage systemic risk.

What we do not want is to go back to the "bad old days" of the opaque and complex subprime instruments that caused fire sales, price drops and illiquidity. In a nutshell, what we want is to promote a safe, deep, liquid and robust market for securitisation, attracting a broader and more stable investor base to help allocate finance to where it is most needed in the economy.

This is vital to stimulate investment, and get banks lending to the real economy again. And I hope we can see quick progress by the co-legislators.