EU to revive securitisation to channel more funds to companies
By Huw Jones
LONDON (Reuters) - The European Commission is expected to allow the securitisation of more assets such as car and consumer loans and small business loans as part of a drive to channel more funds into the flagging European economy, banking sources said on Thursday.
The new rules, part of a law designed to make banks better able to withstand shocks, were due to be published, possibly as soon as Friday, along with another law to keep insurers solvent which will also encourage more securitisation.
Reviving securitisation, whereby loans are pooled to pay interest on bonds, is part of the EU's new flagship capital markets union project to encourage fledgling companies to turn to markets for funding rather relying too much on banks.
Banks have long dominated funding for companies but lenders have become more cautious as they must comply with new rules to increase their capital levels so that taxpayers won't have to bail them out again in another crisis.
The European Commission, the EU's executive body, is expected to introduce the new rules as part of two so-called delegated acts, one on insurance solvency and the other on bank liquidity.
Combined they represent the EU's first regulatory action to revive and restructure asset-backed securities (ABS), a sector tainted by ABS linked to poor quality U.S. home loans turning toxic in 2007, sowing the seeds of the global financial crisis.
EU policymakers hope the regulatory changes to encourage the issuing and selling of ABS will release more funds to invest in growth and jobs. The European Central Bank is also planning to buy chunks of ABS in coming months as a way of injecting money into the weak eurozone economy and giving the ABS a confidence boost.
Jonathan Hill, the Briton who takes up the reins as EU financial services commissioner next month, told the European Parliament this week there was a need to differentiate between safe and risky securitised debt.
"I know that in the delegated acts on Solvency II and liquidity, a differentiated approach to high quality securitisation is being looked at," Hill said.
"We should not take risks but we should not take the view that it's not possible to find ways of bringing investment back into the economy," he said.
The EU, along with the ECB and the Bank of England, want to create a high quality market segment that would benefit from lower capital charges for banks who originate the security, and for insurers and others who buy it.
The delegated act on insurer solvency is expected to offer a lighter capital treatment for top rated ABS bought by insurers.
"This is the first attempt in the European Union to define high quality securitisation," said Cristina Mihai, a policy advisor at Insurance Europe, which represents the bloc's insurance companies.
Reviving ABS will take time, however.
"After lowering their original capital charges, we can talk more about avoiding unintended consequences of no longer investing in this asset, rather than encouraging the buying of ABS by insurers," Mihai said.
The second delegated act details the assets banks can hold in new mandatory buffers they can tap to withstand rocky markets unaided for up to month.
Although not seeking to define high quality ABS, it aims to encourage issuance by endorsing a wide range of ABS that can be included in a bank's liquidity buffer.
Allowing pooled debt based on car and consumer loans, and loans to small and medium sized companies, will breach globally agreed rules known as Basel III which limit ABS to residential mortgage backed securities in a bank's liquidity buffer.
But there is no global law to make Basel legally binding.
(Reporting by Huw Jones; Editing by Vincent Baby)
