Wednesday, April 09 12:52:45
European policymakers are drawing up plans to revive the market for repackaged debt in a bid to lure investors back to a sector that was at the heart of the worst financial crisis in a generation.
Securitisation is seen as key to helping banks fund themselves and the economy but the market has shrivelled since packages of high-risk U.S. home loans pooled to create bonds imploded in 2007 when the underlying assets proved to be bankrupt.
That caused colossal losses for banks and tarnished securitisation, which has yet to recover in Europe with Nomura estimating the market now to be 650-700 billion euros, half its pre-crisis size.
Central bankers and regulators have spoken in favour of high quality securitisation for months but with little impact.
The drive has been given a new sense of urgency as the European Central Bank considers plans for quantitative easing (QE) - effectively printing money - by buying assets such as corporate debt.
ECB Executive Board member Yves Mersch said on Monday the central bank and Bank of England will aim to publish a paper on securitisation at the International Monetary Fund's Spring meeting in Washington this weekend.
However, reviving the market is likely to take many months at least to spur enough new issuance, putting a question mark over how quickly QE could be deployed if deflation took a grip in Europe.
Behind the scenes, the BoE, ECB, the European Commission and the European Insurance and Occupational Pensions Authority have met to agree a common approach to reviving securitisation, a person familiar with the issue said.
The core aim is to split the market in two by creating a category of top quality debt that will benefit from more lenient capital treatment to encourage issuance by banks and purchases by big investors such as insurers.
"We want to get the supply side ready for when the demand is there. It's up to the market in the end," the person said.
The rest of the market would likely struggle to survive, the person added, a prospect that is already alarming banks.
Capital treatment for banks creating top quality securitised debt could be set "at or near to Basel II" - a global accord that imposed a minimum risk-weighting for securitised debt of 7 percent - the source said.
After the financial crisis, Basel II was replaced with the tougher Basel III that proposed a doubling of capital requirements for securitised debt to 15 percent, a level banks say is too high.
Lenders have called for a level of around 10 percent.
Separately, negotiations are already underway in the EU to set a capital charge insurers would have to pay on holding securitised debt at an attractive enough level.
The plans beg the question how will high quality securitisation be defined and what then happens to the rest.
"We all know what high quality is when we see it but it's very hard to define and if we cannot get a global definition, then we should strive for a European one," said Richard Hopkin, managing director of securitisation at AFME, the European banking lobby.
"Regulators should think carefully about where the line is drawn between asset-backed securities that are high quality and the rest. If the rest is hammered by capital charges then that could be a problem," Hopkin said.
So far efforts to rehabilitate securitisation have focused on residential mortgage backed securities (RMBS), but the high quality category could also include bundled car, credit card and small business loans.
Some policymakers talk of an EU authorised or endorsed credit card whose loans could be bundled into securitised debt.
Securitisation was seen as part of "shadow" banking and during the financial crisis policymakers pledged a crackdown.
Since then the mood has changed as concerns over financial stability have eased and politicians look for ways to boost growth. Its revival could also help rebalance the region away from a heavy reliance on bank loans for funding businesses.
Longer term, another target for European policymakers could be the new liquidity buffer banks across the world have to build up to withstand short-term market shocks unaided.