Threats of penal capital and liquidity rules for asset-backed securities are stopping investors buying the debt that the European Central Bank is promoting as a savior for the region’s economy.
Lloyds Banking Group Plc (LLOY) and New York-based MetLife Inc. (MET) say they have withdrawn from Europe’s ABS market as they wait to hear how much capital will be needed to back their holdings, and whether the securities can be counted as liquid assets.
“We have been fairly conservative in taking a view as to what will come through in the regulations, so we’ve really had about an 18-month hiatus now whilst there’s been this period of uncertainty,” Edward Baker, director of asset-backed securities management at London-based Lloyds, said yesterday at the Global ABS conference in Barcelona.
The Basel Committee on Banking Supervision is considering changes to rules governing the debt that will be introduced later this year. ECB President Mario Draghi said last week regulators are holding back Europe’s $2 trillion ABS market, which contracted 32 percent since 2009.
“We’ve been pretty much inactive in this space just given the level of uncertainty that we’re seeing here,” Francisco Paez, who oversees $20 billion of the debt at New York-based MetLife, said at the conference.
Yves Mersch, a member of the ECB’s Executive Board, told the conference there should be a “more holistic approach” to ABS regulations because at present, rule changes were “proceeding in an uncoordinated manner.”
Lenders from London-based Barclays Plc to Deutsche Bank AG in Frankfurt have also said capital rules are becoming so onerous they may shun some of the debt. Pending regulations for insurers are also among the most punitive for asset-backed bonds, with firms required to pledge risk-weighted capital on the debt for the first time.
Regulators must take bank warnings “that the sky is going to fall in with a degree of skepticism,” according to Wayne Byres, secretary general of the Basel Committee.
“But equally there’s no desire in the committee to do anything that unduly impairs the securitization market,” Byers said in an interview in his Basel office. “The objective is always to get the balance right.”
Andreas Dombret, a member of the ECB’s Supervisory Board, said today that revitalizing the ABS market is “first and foremost a job for industry” rather than for regulators.
To contact the reporter on this story: Alastair Marsh in London at firstname.lastname@example.org