Banks May Win Capital Rule Easing in EU’s ABS Market Push

The European Union is considering loosening banks’ capital rules in a drive to revive its 181 billion-euro ($206 billion) market for asset-backed debt.

The 28-nation bloc may reduce the capital it requires banks to have for some securitized debt, according to policy outlines published on Feb. 18 by the European Commission, the EU’s executive arm. It is also exploring measures to boost standardization in the market by creating an “EU securitization structure.”

“One of the regulatory issues that warrants further consideration is the capital treatment of investors in securitization,” the commission said. Any moves to ease capital requirements would be done to favor “simple, transparent and standardized” ABS in a bid to revive the market on a sound basis, it said.

The European market for ABS, like that in the U.S., was brought close to extinction in the financial panic of 2008, which was fueled in part by banks taking heavy losses on securitized U.S. subprime-mortgage debt even though the tranches they held had been considered high-quality. It has been slow to recover.

The European Central Bank last year embarked on a purchase program that targeted ABS as it tried to encourage banks to lend more to European households and companies. ECB President Mario Draghi has called for regulatory changes to help boost the market.

‘Bad Old Days’

“We will not be going back to the bad old days of sub-prime mortgages,” Jonathan Hill, the EU’s financial services chief, told reporters in Brussels as he presented the commission’s plans. “Our door remains firmly closed to the complex, highly opaque and risky securitization instruments which were of course part of the crisis.”

The issuance of bonds backed by everything from auto loans to credit-card payments has plummeted since the 2008 peak of 819 billion euros, reaching only about a fifth of that level in 2013, according to Association for Financial Markets in Europe data. U.S. issuance totaled 1.5 trillion euros, down from a 2003 peak of 2.9 trillion euros, the data show.

The publication of draft plans by the commission starts a public comment period that runs until May 13, with more detailed plans and possibly legislation to follow. It’s part of a broader project to stimulate EU capital markets.

Global capital standards published by the Basel Committee on Banking Supervision “could be used as a baseline for the review of EU rules,” according to the commission.

Quality Labels

The commission’s ABS plans focus on setting criteria they should meet in order to win preferential regulatory treatment. For those meeting the requirements, onerous verification requirements for risk-retention rules could be lifted, and they could be promoted by additional measures such as quality labels.

“We are consulting today on the best ways to single out a category of highly transparent, simple and standardized products,” Hill said. The goal is an “EU market for high-quality securitization,” he said. “If we can achieve that, then we can help free by banks balance sheets to lend to households and businesses.”

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