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Call for action on securities revival

Monday, June 09 15:40:03

Europe's two top central banks must turn talk of reviving the securitised debt market to fund economic growth into speedy action, a top banking lobby said today.

The market for debt backed by pooled home and other loans was tarnished when bonds securitising low quality U.S. mortgages became untradable, kicking off the 2007-09 financial crisis that eventually led to taxpayers having to bail out banks.

The European Central Bank and the Bank of England have said for months that reviving the top quality end of the market would help plug a funding gap created by banks lending less, especially to small and medium-sized companies.

As part of measures to pump money into the sluggish euro zone economy, the ECB also said last week that it was stepping up preparations to buy asset-backed securities, pending "desirable" regulatory changes to spur issuance.

The two central banks have outlined hurdles to a revival and the Association for Financial Markets in Europe (AFME), which represents leading banks, said on Monday it was now time to act.

Some 181 billion euros of securitised debt was issued in Europe last year, down 28 percent on 2012, only half of which was actually placed with investors, AFME said in a report. Placed issuance fell to 13.6 billion euros in the first quarter of this year.

"High-level statements of support from central banks and policymakers are extremely welcome," AFME Chief Executive Simon Lewis said.

"But they need to be translated into positive developments in the reality of regulation. AFME is calling for urgent, coordinated action by European policymakers to reconsider the treatment of securitisation."

Even regaining the volumes seen a decade ago could release up to 150 billion euros a year for the economy, AFME said.

The banking lobby has called on global and European Union regulators to ease the amount of capital that lenders, who create the debt, and insurance companies, who are key buyers, must set aside in case the bonds turn toxic, as in 2007.

Rating agency Standard & Poor's said last month that proposals by the Basel Committee of banking supervisors from nearly 30 countries would increase the "risk weighting" for securitised debt by up to eight times current levels.

For buyers like insurers, some triple-A-rated securitised debt would attract capital charges more than 17 times higher under proposed EU rules than for covered bonds, a comparable debt instrument, S&P added.

Basel is set to finalise its capital charges on securitised debt this year and may not radically scale back capital charges.

Yves Mersch, a member of the ECB's executive board, said last month that Europe should go it alone in cutting capital charges if it takes too long at the global level. He will speak at an AFME conference on securitisation in Barcelona this week.

Easing capital charges for insurers would be easier as it would only require agreement at the EU level, though regulators there have cautioned that such a move must be backed by evidence that risks are still being properly covered.

AFME has also urged European policymakers to agree on a single common definition of what constitutes high quality securitised debt to benefit from easier capital treatment.

Banks want the EU to make it easier for them to hold a wider range of securitised debt as part of new liquidity buffers to withstand shocks that Basel requires them to put in place.

Basel is limiting the amount and type of securitised debt that can be included in the liquidity buffer but the EU is expected to breach the rule, perhaps by allowing debt based on car loans and not just mortgages to be included. (Reuters)