EU Mulls ABS Range Broader Than Basel for Bank Liquidity

The European Commission is considering going beyond global rules in expanding the range of asset-backed securities that banks can hold to meet a new liquidity requirement.

Banks will be allowed to use securitizations backed by assets from car loans to small business and consumer debt for as much as 15 percent of the buffers they will be required to hold under a European Union rule known as the liquidity coverage ratio, according to an EU document obtained by Bloomberg News.

The plan would allow banks to choose from a “wider range” of asset-backed debt than a blueprint prepared by the Basel Committee on Banking Supervision, which sought to limit securitizations to those backed by residential mortgage debt, according to the document, which has been distributed to EU national governments and the European Parliament for informal consultation before its publication. The EU plan also allows banks greater scope to use covered bonds to meet liquidity requirements.

The commission, the European Union’s executive arm, is in the final stages of planning how to apply the liquidity coverage ratio, which will force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. The rule is scheduled to phase in between 2015 and 2018.

The proposals, set to be published later this month, will be reviewed by national officials and the European Parliament. The liquidity rule is seen as one of a range of measures that can be used to boost the revival of the market for asset-backed debt.

‘Broad Portfolio’

That effort was boosted today when President Mario Draghi said the European Central Bank will “purchase a broad portfolio of simple and transparent securities” on the ABS market.

The wider range of ABS allowed under the rule will avoid “the unintended consequences that non-recognition” of ABS backed by assets other than residential mortgage debt “would have in repressing current and prospective demand for these instruments,” the commission said.

The liquidity rule also contains quality criteria that ABS would have to meet to satisfy the requirement. Limits to the asset-backed debt that will be allowed would include that it must be from the “most senior tranche” of the securitization, according to the document.

Other criteria include that the instrument is not a “re-securitization or a synthetic securitization” and that the administration of the underlying exposures is governed by a servicing agreement.

The details on securitization are similar to those in previous drafts of the commission plan. The draft also confirms moves to allow the highest quality covered bonds to count for as much as 70 percent of bank’s required buffers, as opposed to a limit of 40 percent in the Basel rule.

An commission spokeswoman declined to comment immediately on the document.

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