EU Banks Bundled-Debt Proposal Challenged by Commission

European Union banks’ push to be allowed to use asset-backed securities to partly meet an international liquidity rule was challenged by EU officials who said exceptions must meet high standards.

The European Commission is inviting comments by the end of this month on how to implement the measure, known as a liquidity coverage ratio, or LCR, in the 28-nation EU.

While the institution is open to listen to arguments, it will put forward deviations from the international standard only if they are justified by “extremely strong policy opportunity issues supported by strong empirical evidence,” Niall Bohan, the commission’s head of unit for banks and financial conglomerates, said today at a public hearing.

The commission’s analysis of ABS markets at this stage is that they don’t seem to meet the criteria for ABS to count as highly liquid, Bohan said at the televised hearing. Officials are open to keeping the matter under review and monitoring future market developments, he said.

The EU is facing calls from institutions ranging from global banks to German car manufacturers to relax a blueprint agreed on by the Basel Committee on Banking Supervision for which assets can be used to meet the LCR, in order to give lenders some scope to use ABS.

The LCR rule will begin to take effect next year and is scheduled to fully apply to EU banks by 2018. It requires lenders to hold enough easy-to-sell assets to survive a 30-day funding squeeze.

The Basel plan, published last year, doesn’t allow banks to count securitizations other than residential mortgage-backed securities in LCR buffers, ruling out ABS -- a term used to describe securitizations backed by other kinds of debt.