EU Rebuffs U.S. Criticism of Asset-Backed Debt Revival Drive

  • Financial crisis caused fewer European defaults: EU Commission
  • EU says plan to revive ABS passed muster with Basel Committee

The European Union pushed back against U.S. criticism of its efforts to revive the asset-backed securities market, rejecting the assertion that the plan poses unnecessary risks to financial stability.

U.S. officials said the EU proposal heightens risk by easing capital requirements on “simple, transparent and standardized” securitizations, and unfairly requires issuers and other connected firms to be based in the 28-nation bloc.

An official at the European Commission, the EU’s executive arm, said the criticism was misplaced because the plan presented by Jonathan Hill, the EU’s financial-services commissioner, was based on work by bodies including the Basel Committee on Banking Supervision, which counts U.S. regulators among its members. The official asked not to be identified because the debate isn’t public.

The EU plans to promote simple securitized products in a bid to spur lending to small businesses by giving banks more options for funding loans. The proposal reflects default rates on asset-backed securities during the financial crisis that were significantly lower in the EU than in the U.S., the commission official said.

U.S. officials say the EU plan is short-sighted in two ways: lowering standards on plain-vanilla asset-backed securities poses more of a threat to financial stability than raising them for riskier products. In addition, Hill’s plan is restricted to EU companies and wouldn’t allow banks to work with global financial markets. 

Broad Support

This second concern becomes more prominent if the plans go forward because of broad support for their aim to boost capital markets and reduce EU companies’ dependence on bank loans, the U.S. officials said, asking not to be identified because U.S. regulators haven’t made their stance public.

EU commission officials have signaled that excluding firms based in non-EU nations shouldn’t be that big a deal, because most international banks that issue securities would be expected to have European subsidiaries.

Hill’s initial proposal included a more open approach to non-EU nations, but this wasn’t included in a draft law approved this month by the bloc’s member states. That deal paves the way for talks with the European Parliament, which has not yet settled on its negotiating position on the measures. If the legislation were enacted as is, it wouldn’t come up for review for as long as three years.

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