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Bankers See Reprieve From Basel Clampdown on Asset-Backed Bonds

A European bank group said it sees grounds for optimism that global regulators will rein in draft rules for the asset-backed bond market after lenders warned they would starve the economy of credit.

Proposals published last year by the Basel Committee on Banking Supervision, a global group bringing together regulators from 27 nations including the U.K., U.S. and China, were “very, very harsh,” Richard Hopkin, head of securitization at the Association for Financial Markets in Europe, said in a phone interview on Dec. 6. “You can certainly destroy the market if you get the capital rules wrong.”

“We have had very constructive, thoughtful and engaged discussions with the Basel committee, and are awaiting the revised approaches due to be published in the next few weeks,” he said. “We are cautiously optimistic.”

The draft securitization rules were one of the main points of the agenda at a meeting of the Basel committee last week in Hong Kong. The Basel group has said that it is seeking to make rules “more prudent and risk sensitive” by setting stricter curbs on how banks should measure possible losses, and by limiting reliance on external credit ratings.

Regulators have identified the pre-crisis boom in asset-backed bonds 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.

Securitization Peak

The size of the global securitization market plummeted after the 2008 collapse of Lehman Brothers Holdings Inc. Some 251 billion euros ($344 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 AFME. U.S. issuance totaled 1.5 trillion euros, down from a 2003 peak of 2.9 trillion euros, according to the data.

AFME, based in London, represents international lenders including Deutsche Bank AG, BNP Paribas SA, HSBC Holdings Plc and Royal Bank of Scotland Group Plc.

The Basel committee declined to comment on last week’s meeting.

In tandem with the push for tougher regulation, authorities are also increasingly looking to securitization as a means to boost financing of companies, at a time when banks’ lending activity is limited by the need to meet stricter capital and liquidity rules.

“I think the reality is starting to hit home that securitization has real benefits when it’s sensibly deployed and prudently regulated,” Hopkin said. “It is a way to provide finance and help banks manage deleveraging while still continuing to lend.”

Liquidity Rule

Other potential impediments to the market include plans by European Union regulators for implementing a Basel bank liquidity rule, Hopkin said. Proposals by the European Banking Authority for applying the measure, known as a liquidity coverage ratio, or LCR, are “worrying,” he said.

“If the EBA doesn’t allow the inclusion of at least some high-quality securitized debt in the LCR, it will seriously hinder the prospects of recovery of the market,” Hopkin said. “We don’t think they have gone about it the right way. We hope that there’s still room for them to change their minds on that.”

The EBA in London declined to comment.

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