EU draft law would let banks self-certify pooled debt
By Huw Jones
LONDON (Reuters) - Banks would in future need to declare publicly that their pooled debt is of top quality in order to benefit from lower capital charges, according to a draft European Union law seen by Reuters that is raising concerns from some investors.
The proposal is significant because pooled debt, which merges masses of loans like mortgages into asset-backed securities (ABS), was at the heart of the global financial crisis. ABS based on poor-quality U.S. home loans became untradable in 2007, triggering a string of bank failures.
The EU's executive Commission sees ABS as a key source of funding for the economy but wants to make them "simple, transparent and standardised" or STS, according to the draft, and based only on high-quality loans.
Banks would then benefit from lower capital charges to encourage them to offer such debt.
Banks selling securitised debt would have to notify the bloc's European Securities and Markets Authority (ESMA) that it meets the new quality criteria set out in the draft law.
The EU watchdog would publish this notification on its website for investors to see, though this would not "imply that ESMA... have certified that the securitisation meets the STS criteria".
"Originators and sponsors are jointly liable for any loss or damage resulting from incorrect or misleading notifications," the draft law adds.
But investors said on Thursday that "self-certification" by banks is what led to the financial crisis in the first place.
"An independent third party needs to certify that the issuance in question does what it says on the tin - that it is simple, transparent and standardised," The Investment Association trade body said in a statement.
"Once that is done, investors can get on with doing the due diligence and focus on the actual credit analysis," it added.
EU financial services chief Jonathan Hill is due to formally propose the draft law in coming weeks as an "quick win" in his plan for a "Capital Markets Union" (CMU).
It will need approval from EU states and the European Parliament to come into force, with changes likely.
The draft law recommends cutting capital charges on banks originating ABS by a quarter, as expected after a recommendation from the bloc's European Banking Authority in June.
The CMU aims to boost funds raised by markets for economic growth and reduce the EU's heavy reliance on banks.
"Promoting the development of a securitisation market based on sound practices will contribute to a return to sustainable growth and job creation," the draft law said.
(Reporting by Huw Jones; Editing by Mark Trevelyan)
