Synthetic securitisation offers limited boost to corporate lending, says ECB

The European Central Bank (ECB) has found that synthetic securitisation provides only a marginal boost to corporate lending, raising questions about how far the growing market can contribute to European economic growth. An ECB blog analysis by Johanne Evrard, Wagner Eduardo Schuster, Fabian Wassmann and Michael Wedow examined whether banks use the capital freed through synthetic securitisation to extend more loans to companies. Synthetic securitisation is a process in which a bank keeps loans on its balance sheet but transfers the risk of borrowers defaulting to investors, usually through financial contracts known as credit derivatives. The arrangement can reduce the bank’s exposure to losses and free regulatory capital, potentially allowing it to issue additional loans. The ECB analysis found that banks issuing synthetic securitisations did lend marginally more, but they also tended to return more capital to shareholders through dividends. Securitisation more broadly involves banks grouping loans, such as mortgages or business loans, and turning them into tradeable securities with different levels of risk. In traditional securitisation, the loans are transferred to a separate entity and removed from the bank’s balance sheet, whereas synthetic securitisation leaves the loans with the bank while transferring the associated credit risk. The European securitisation market has revived modestly in recent years, with synthetic transactions driving much of the growth. The volume of synthetic securitisations has almost tripled since 2021, while traditional securitisation volumes have remained broadly stable. By the end of 2025, synthetic securitisations backed by loans to small and medium-sized enterprises were worth about €480 billion, compared with €380 billion for traditional securitisations. The ECB said securitisation could, in principle, help firms that face difficulties obtaining credit, and some research has found that it can reduce borrowing costs and support lending during normal economic conditions. However, the evidence is mixed and the benefits may come with financial stability risks. Research cited by the ECB suggests that if banks use released capital to expand lending, they could become less strongly capitalised and reduce their monitoring of borrowers. Synthetic securitisation can also create stronger links between banks and non-bank financial institutions, potentially allowing financial stress to spread more easily. The ECB analysis found that banks using securitisation recorded average corporate loan growth of around 5 per cent between 2018 and 2025, compared with about 1 per cent among banks that did not use it. But after accounting for other factors affecting lending, including bank size, capital levels and wider economic conditions, the effect of synthetic securitisation proved much smaller. The analysis found that a 1 per cent increase in synthetic securitisation issuance was associated with only a 0.02 per cent increase in corporate loan growth. The ECB said this effect was too small to have a meaningful economic impact. As a result, synthetic securitisation alone was unlikely to generate lending on the scale required to significantly boost the European economy, particularly when compared with the €750 billion to €800 billion annual investment gap identified in the Draghi report. The ECB said the abundant liquidity available to banks in recent years may also have limited the contribution of synthetic securitisation to lending, although its importance could increase if banks face tighter funding conditions. The analysis also highlighted what banks do with the capital released through securitisation. Rather than lending it to businesses, banks may retain the capital or distribute it to shareholders through dividends. The ECB found that the effect on dividend payments was three times larger than the effect on corporate lending, with a 1 per cent increase in synthetic issuance associated with a 0.07 per cent increase in dividend payouts. Banks active in the synthetic securitisation market paid higher dividends on average, with the difference particularly pronounced in 2024 and 2025. The ECB said synthetic securitisation could nevertheless play a useful role in capital management, risk mitigation and diversification, while reducing concentrations of credit risk. However, retaining less capital or increasing leverage could weaken banks’ ability to absorb future shocks. Risks could also arise if investors providing credit protection fail to renew that protection or cannot absorb losses, particularly where the protection has not been funded in advance. The ECB said the review of the European securitisation framework, which forms part of the EU’s Savings and Investments Union agenda, could help revive the market by increasing demand for securitisation products and encouraging genuine transfer of risk outside the banking sector. It cautioned, however, against focusing solely on reducing banks’ capital requirements for securitisation. “Financial markets and equity investors may be better suited to financing novel but risky projects,” the ECB analysis said. “Bank lending, on the other hand, tends to be directed towards the real estate sector, which contributes only marginally to productivity growth,” it said. The ECB concluded that the potential economic benefits of synthetic securitisation should not be overstated, making deeper and better integrated capital markets, particularly equity markets, an important objective for the Savings and Investments Union.