European Union banks are set to win the right to use a wider range of asset-backed debt to meet their liquidity requirements as the bloc hunts for ways to boost the market for such securities.
The European Commission is advocating that securitizations of loans to small businesses and consumers including car buyers should be allowed to count for as much as 15 percent of the buffers banks will be required to hold under the rule, according to an EU document obtained by Bloomberg News.
For the debt to be eligible, the securities must be from the most senior part of a securitization, which itself needs to be of at least 100 million euros ($135 million), according to the document. The securities also must mature within five years or less.
Limits to the asset-backed debt that will be allowed would include that it must be from the “most senior tranche” of the securitization, that the instruments must have an issue size of at least 100 million euros ($135 million) and that the “remaining weighted average time to maturity is 5 years or less,” according to the document, prepared for a June 16 meeting with national experts.
The size of the global securitization market plummeted in the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc.
About 181 billion euros of bonds backed by everything from auto loans to credit-card payments were issued in Europe in 2013 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, the data show.
Authorities from central banks to Michel Barnier, the EU’s financial services chief, have identified the market as a way to spur both bank and market financing of households and businesses.
The push to revive Europe’s ABS market gained momentum on June 5, when Draghi, president of the European Central Bank, said the ECB would “intensify preparatory work related to outright purchases” of asset-backed debt.
The European Commission plans concern how to implement an international rule published in 2013 by the Basel Committee on Banking Supervision. The measure, a key plank of global regulators’ response to the financial crisis, requires banks to have enough easy-to-sell assets to survive a 30-day funding squeeze.
While the commission’s approach retains a Basel rule that securitized debt can’t count for more than 15 percent of banks buffers, it widens the range of instruments that can be used. The Basel committee had limited this to debt backed by residential mortgages.
Securitized debt must be “highly liquid” to count under the rule, according to the commission document.
Asset-backed debt won’t be eligible for inclusion if it is based on “exposures to a credit-impaired borrower,” such as someone who “has been the subject of an insolvency or debt rearrangement process within three years prior to the date of origination” of the ABS. More complicated structures such as so-called synthetic securitizations based on derivatives and resecuritizations also wouldn’t be allowed.
Banks would also have to write down the securities by as much as 35 percent from their market value, when they include them in the buffers.
The commission has said that it will publish plans for applying the liquidity rule by the end of this month. The measure is set to begin phasing in next year and to fully apply in the bloc as of 2018.
The commission is also pressing ahead with plans to give banks more scope to include covered bonds in their liquidity buffers than foreseen by Basel, according to the document.
The document retains plans to allow “extremely high quality covered bonds” to count for as much as 70 percent of the buffers -- a 75 percent increase compared with Basel.
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