EU Turns to Asset-Backed Debt to Beat Business-Funding Drought

The European Union will seek to revive the market for asset-backed debt in a bid to ease bottlenecks that are choking businesses’ access to funding.

The European Commission called today for international agreements on the definition of “high quality” securitizations, with a view to giving them preferential treatment in regulations, according to an e-mailed statement. The EU will also also seek accords on measures aimed at improving information available to potential investors in asset-backed debt, and on how banks that carry out securitizations should retain some of the risks.

“We must promote high-quality securitization,” Olli Rehn, the EU’s economic and financial affairs commissioner, said in the statement. The step is necessary to enable small businesses to “obtain the resources they need to invest and expand.”

The size of the global securitization market plummeted in the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc. Some 251 billion euros ($345 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 Association for Financial Markets in Europe. U.S. issuance totaled 1.5 trillion euros in 2012, down from a 2003 peak of 2.9 trillion euros, according to the data.

Prime Causes

Securitization is a process where a bank pools assets, such as debt arising from mortgages or other loans it has offered to customers, and re-sells the risk to investors.

Regulators identified the pre-crisis boom in securitizations 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.

Still, in tandem with toughening regulations, authorities are increasingly looking for ways to encourage the revival of the market to allow banks to expand their lending and to boost the role of other institutional investors in financing businesses.

“A wider use of high-quality securitization products, with appropriate mitigation of risks involved, has the potential to unlock additional funding to the real economy,” the commission said.

Business Funding

The push on securitization is part of a package of measures unveiled by the commission today to bolster long-term funding for businesses and infrastructure projects.

The measures include guidelines on regulation of crowd-funding websites and a draft law to overhaul EU rules for company pensions.

That law would remove barriers to such pension programs operating cross border and update rules on the range of assets they can invest in. The legislation, which requires approval from national governments and the European Parliament to take effect, would also introduce rules on pension-fund manager pay.

Other parts of today’s plans include a review of regulation for covered bonds, and an update of EU rules on shareholder rights.

On securitization, regulators face demands from firms ranging from global banks to car manufacturers to adapt a range of regulations in ways that favor the market for bundled debt.

Companies including Bayerische Motoren Werke AG and Volkswagen Financial Services AG have called for lenders to be given some scope to count asset-backed securities, or ABS, based on car loans toward meeting a liquidity rule that was agreed on by the Basel Committee on Banking Supervision.

Liquidity Rule

Banks have also called more generally for ABS to be included in the rule, which requires banks to hold buffers of easy-to-sell assets.

The commission has said that it will publish plans by the end of June for how the rule, known as a liquidity coverage ratio or LCR, should apply to EU banks. The measure is scheduled to begin phasing in next year.

Commission officials indicated earlier this month that ABS may not meet the criteria for inclusion in banks’ buffers.

Banks are also urging the Basel committee, which brings together regulators from 27 nations including the U.K., U.S., and China, to ease rules on the amount of capital they must have to cover possible losses on securitized debt.

The EU is also reviewing the capital rules that should apply to insurers when when they buy securitized debt. The European Insurance and Occupational Pensions Authority, an agency that co-ordinates the work of national regulators, published a blueprint in December for defining high-quality securitizations that would be targeted for favorable treatment.

The proposal is part of work to prepare for the start of updated EU rules for insurers, known as Solvency II, in 2016. The commission has said that it will take the EIOPA proposals into account in preparing technical standards to underpin the new law.

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