EU Seeks to Boost Asset-Backed Debt Market to Spur Business

The European Union will call for moves to stimulate the market for asset-backed debt in a bid to ease bottlenecks impeding access to funding for businesses.

Michel Barnier, the EU’s financial regulation chief, will back international efforts to define “high quality” securitizations, with a view to “a possible preferential regulatory treatment for such products,” according to a document obtained by Bloomberg News.

Barnier will also seek global accords on measures aimed at improving information available to potential investors in bundled debt, and on how banks that carry out securitizations should retain some of the risks, according to the document.

The size of the global securitization market plummeted in the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc. Some 251 billion euros ($346 billion) of bonds backed by everything from auto loans to credit-card payments were issued in Europe in 2012, compared with a peak of 711 billion euros in 2008, according to data from the Association for Financial Markets in Europe. U.S. issuance totaled 1.5 trillion euros, down from a 2003 peak of 2.9 trillion euros, according to the data.

Securitization is a process where a bank pools assets, such as debt arising from mortgages or other loans they have offered to customers, and re-sells the risk to investors.

Prime Causes

Regulators identified the pre-crisis boom in securitizations as one of the prime causes of the turmoil that followed, as banks struggled with a drop in the value of previously highly-rated instruments based on residential mortgage debt.

Still, in tandem with toughening regulations, authorities are increasingly looking for ways to encourage the revival of the market to allow banks to expand their lending and to boost the role of other institutional investors in financing businesses.

“The climate on uncertainty and risk aversion created by the financial and economic crisis has affected both the supply and demand of long-term financing,” according to the document.

Regulators face demands from firms ranging from global banks to car manufacturers to adapt regulations in ways that favor securitization.

Companies including Bayerische Motoren Werke AG (BMW) and Volkswagen Financial Services AG have called for lenders to be given some scope to count asset-backed securities based on car loans toward meeting a liquidity rule agreed on by the Basel Committee on Banking Supervision.

Pension Funds

Banks are also urging the Basel group, which brings together regulators from 27 nations including the U.K., U.S., and China, to ease rules on the amount of capital they must have to cover possible losses on purchases of securitized debt.

Barnier’s plans on securitization are part of a package of measures to boost long-term corporate financing that he will present tomorrow, according to the EU’s website. The proposals also include a review of regulations for covered bonds, guidelines for crowd-funding websites, and a draft law on occupational pension funds.

Europe’s historically heavy reliance on bank intermediation needs to move towards a more diversified system of direct capital market financing and a greater involvement of institutional investors,” the EU commission said in a March 21 statement on its website.

Infrastructure Spending

Tomorrow’s package also aims at boosting infrastructure spending in the EU.

“Investment needs for transport, energy and telecom infrastructure networks of EU importance are estimated at 1 trillion euros for the period up to 2020,” according to the document.

The commission will also assess whether to introduce a savings account that would be available across the 28-nation bloc and used to finance long-term projects. It is also planning to unveil in the coming weeks a draft law to boost company shareholders’ say on executive pay, according to the document.

Chantal Hughes, a spokeswoman for Barnier, declined to immediately comment on details of the measures.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net Peter Chapman, Michael Shanahan

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