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Slow Down Securitization Revival, Professors Tell EU Parliament

  • Proposal under consideration would lower bank capital charges
  • Group’s letter says plan brings back crisis-era bubble risk

The European Parliament shouldn’t rush to approve a proposal to revive asset-backed securities markets as that could bring back risks that helped crash the global financial system in 2008, a group of academics will urge in a letter to be sent Monday.

The group is calling for an independent impact study that would address their concerns before the process moves forward. About 85 academics from the EU have signed the letter made available to Bloomberg. The parliament is scheduled to hold discussions on the proposal this week.

The European Commission has proposed softening capital charges for certain asset-backed securities to encourage more bundling of loans into bonds that can be sold on markets. That would free up capital to expand lending, European officials have said. Global rules were revised following the financial crisis to increase capital charges on such securities held by banks after dozens of U.S. and European lenders holding U.S. mortgage-backed bonds had to be rescued by their governments. The European proposal would reverse the gains made since the crisis in reining in such risks and expose European banks to similar troubles in the future, the group wrote.

“It will immediately improve the bottom line of banks but does nothing for growth and jobs,” the academics said. The plan would allow “the same kind of complexity that caught investors as well as regulators off guard before the crisis.”

European officials have pushed for rule changes with the hope of encouraging more securitizations of loans to small businesses, whose borrowing needs have been insufficiently met in recent years as banks struggle to raise capital and sell bad assets. The proposal will instead stoke mortgage securitizations as in the U.S. prior to the crisis, doing more to fuel a housing bubble than back small enterprises, the academics argued. The banks will be allowed to use derivatives to offload further risk to the bonds, which were also behind the systemic collapse in 2008, they said.

Defining ‘Safer’

When the U.S. mortgage market collapsed, derivatives connected to asset-backed securities multiplied the losses and spread them throughout the financial system, forcing governments to bail out all kinds of financial institutions in addition to banks.

The European Central Bank and the Bank of England have supported the push for reviving the securitization market. Banks, while applauding the efforts, have urged the new rules extend to legacy assets as well. European regulators, politicians and financial firms have argued that asset-backed bonds in the EU didn’t blow up like those in the U.S. and deserve better treatment.

With the current push, they could become riskier, inflate housing bubbles in the continent and cause systemic losses next time around, according to Daniela Gabor, one of the signatories to the letter.

“Regulators are supposed to label some securitization as safer, but who can define it well?” Gabor, associate professor of economics at University of the West of England in Bristol, said in an interview. “They were supposed to be safe before 2008 too, but we saw what happened then.”

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