EU Lures Asset-Backed Debt Buyers With Capital Relief in RevampBoris Groendahl and Alastair Marsh
The European Union’s plan to revive the asset-backed securities market may heed industry concerns by broadening the range of products eligible for a high-quality label and easing capital requirements for insurers.
The securitization overhaul due next month from the European Commission, the EU’s executive arm, will set out the rules for identifying “simple, transparent and standardized” products that qualify for lower capital requirements. Asset-backed commercial paper with an original maturity of a year or less could be eligible along with longer-term debt, according to an undated draft of the plan seen by Bloomberg.
Jonathan Hill, the EU’s financial-services chief, will extend the revamp to insurance law in a bid to lure buyers into the ABS market. While the law known as Solvency II already offers capital relief for “high-quality” securitizations, investors say it’s not enough.
“Policy makers now seem ready to address the real hurdles in the ABS landscape, and that’s the capital charges,” said Ruben Van Leeuwen, an analyst at Rabobank Nederland in Utrecht. “The plan to update calibrations in Solvency II is a major difference. For a long time they regarded Solvency II as a good example, but the capital charges were way too high even for high-quality ABS and now they seem to acknowledge this.”
Hill proposed the ABS overhaul along with the commission’s Capital Markets Union plan, which aims to boost financing for smaller companies and long-term projects to fuel economic growth. Hill is expected deliver a CMU “action plan” and his “comprehensive package on securitization” at the end of September.
That package will include “updated calibrations” of the capital requirements for ABS in the relevant laws for banks and insurers, the Capital Requirements Regulation and Solvency II, providing for “a more risk-sensitive prudential treatment,” according to the commission working paper.
For the banks, the commission may reduce capital requirements “in line with the advice provided by the European Banking Authority,” which called for levels for qualifying securities to be set an average of 25 percent below those for other products set in December by the Basel Committee on Banking Supervision.
The commission objected at the time that the Basel rules would significantly increase requirements even for highly rated products and should be reviewed.
When the commission, the EU’s executive arm, proposed its high-quality asset-backed securities plan in February, it sought views on whether to include asset-backed commercial paper for the first time. In response, UniCredit SpA, BlackRock Inc. and others argued that admitting ABCP would benefit corporate lending.
“The vast majority of ABCP is designed to provide funding to the real economy by funding assets such as trade receivables, which is exactly what regulators want,” said Jean-David Cirotteau, senior ABS analyst at Societe Generale SA in Paris. “They absolutely should be included in the class of securitizations eligible for better treatment.”
The commission document doesn’t go so far as to make synthetic securitizations, in which credit derivatives are used to transfer risk, eligible for the high-quality label as the industry had sought.
Complex securitizations helped fuel the financial crisis by making it harder for investors and supervisors to understand cash flows and where risks were hidden. The crisis also underlined the importance of strong underwriting in originating the underlying assets and of governance, as well as the importance of giving buyers the tools to carry out their own assessment of the risks, rather than relying on ratings.
The European market for ABS was brought close to extinction in the financial crisis, and it has been slow to recover, even after the European Central Bank began purchasing the securities last year.
Issuance in 2014 amounted to 216 billion euros ($241 billion), down from a high of 819 billion euros in 2008, according to data from the Association for Financial Markets in Europe, which include bonds sold to investors as well as those retained by banks to use a collateral for central bank funding.
Admitting simple and transparent asset-backed commercial paper for preferential regulatory treatment goes beyond the Basel group’s criteria for “simple, transparent and comparable” securitizations, issued last month. The committee said only that it would consider whether to develop criteria for high-quality short-term products.
While the new rules don’t change existing EU requirements for the originator of securitizations to keep 5 percent on its own books, they may shift the onus for policing that requirement away from investors, who are currently responsible for making sure it is met. That could lower a threshold often blamed for reluctance to buy the securities.
The proposal doesn’t foresee an “ex-ante” certification of STS securities by supervising authorities, avoiding another potential obstacle for getting them into the market. Rather, the originator of the security will be responsible for meeting the requirements if it labels the paper that way, according to the document.
A spokeswoman for the commission declined to comment on the draft document.
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