• Lower risk weights on simple securitizations seen as less safe
  • EU proposal also under fire for not including non-EU firms

The European Union’s plan to revive the asset-backed securities market is too geographically limited and may pose unnecessary risks to financial stability, according to U.S. officials.

Jonathan Hill, the EU’s financial-services commissioner, has proposed easing the capital requirements on “simple, transparent and standardized” securitizations in a bid to spur lending to small business by giving banks more options for funding loans. EU nations earlier this month agreed on a version of the draft law that requires all companies involved to be based in the EU to qualify for the special treatment.

The EU plan is short-sighted in two ways, according to the officials, who asked not to be identified because U.S. regulators haven’t made public their stance on Hill’s initiative. For starters, the U.S. view is that lowering standards on plain-vanilla asset-backed securities poses more of a threat to financial stability than raising them for riskier products.

At the same time, the U.S. is sympathetic to EU efforts to boost the bloc’s capital markets and reduce companies’ dependence on bank loans. From that perspective, it’s unclear why the preferences only apply if all issuers and other connected firms are based in the EU. If that provision stands, EU banks wouldn’t be able to qualify for special treatment if they sell asset-backed debt abroad, while U.S. firms wouldn’t be able to take part in securitization deals, the officials said.

Capital Markets

For that to change, the EU would need to make changes once negotiations start with the European Parliament. The parliament has not yet settled on its negotiating position on the measures. Historically it has been less focused on global relations than EU member states.

Hill intends to fast-track the law as a centerpiece of his plan to develop an EU capital markets union. If the legislation were enacted as is, it wouldn’t come up for review for as long as three years.

Both of the U.S. concerns have merit in a global regulatory context, said Nicolas Veron, a senior fellow at the Brussels-based Bruegel research organization. It doesn’t make sense to cut off international financing, he said, and also it adds to a bad precedent of using capital standards as economic incentives rather than financial-sector safeguards.

“It’s disturbing -- capital requirements are supposed to be about the best possible weighting of risks,” Veron said by telephone. “The EU needs to think hard on how it thinks about its position in the global financial system and global financial integration.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE