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Reviving ABS debt market to take years

Tuesday, September 02 13:00:44

Reviving Europe's repackaged debt market to fund economic recovery will take years and hinge on a re-invention of the sector rather than quick regulatory tweaks, bankers and regulators say.

The securitised debt, also known as asset-backed securities or ABS, is created by banks pooling mortgages, and corporate, auto or credit card loans and selling them to insurers, pension funds and even the European Central Bank (ECB). This could help wean the banks off cheap ECB money and provide funds that can be lent to other businesses, helping economies to grow.

But the European market for this debt has dwindled since the market based on subprime U.S. home loans froze in 2007, sowing the seeds of a three-year global financial crisis and instilling a lasting distrust of the sector.

European officials will meet this month to discuss the market, which the ECB desperately wants back on its feet to help raise money for companies in the euro zone's flagging economy at a time when banks, traditionally the main source of funds, cut back on loans after the financial crisis.

The ECB has fuelled market expectations that it could buy securitised debt within months and one of its executive board members, Benoit Coeure, stunned bankers last week by saying the state may need to provide some kind of guarantee to the market.

Since the financial crisis, banks that create securitised debt and its buyers have had to pay higher charges to insure against default, and this is partly to blame for the subdued market, the ECB and the Bank of England have argued.

But there is no global agreement on what constitutes top quality securitised debt, something that could help reassure key investors such as insurance companies that there will not be a repeat of the subprime crisis. This could also bring down capital charges.

ABS makes up only about 1 percent of insurer holdings and capital charges planned by European insurance regulators remain enormous compared with historical default rates for the products, industry lobby Insurance Europe said.

"Reviving the securitisation market will take time," said Cristina Mihai, Insurance Europe policy advisor for investments. "At the moment we don't have stability in the outlook for capital charges to incentivise them or clear calibration of what constitutes high quality ABS."

Others say economic recovery is needed in the first place to generate the demand for more loans that can be securitised.

European Union finance ministers meet Sept. 13 in Milan to discuss rekindling securitisation after issuance in Europe sank to 181 billion euros in 2013 from 711 billion euros in 2008. In contrast, the U.S. market has sprung back from 934 billion euros in 2008 to 1.5 trillion euros last year.

But bankers and regulators are not expecting the European market to snap back even with ECB backing as investors still opt for safer types of debt such as covered bonds which are treated more leniently by regulators.

Reuters reported in August that a document for the EU ministers' meeting this month sets out a "roadmap" to revive securitisation that stretches well into 2015 as 19 EU and global initiatives are underway, raising concerns over coordination.

It recommends assessing the state of play by late 2015 to see if legislation, which could take years to approve and implement, is needed.

Greg Medcraft, chairman of the International Organisation of Securities Commissions (IOSCO), a global body of regulators, said scaling back capital charges is not a silver bullet for a lasting revival that will take time to put in place.

"We have got to think a bit more holistically than that," Medcraft told Reuters. "A focus on capital charges is probably the old world. The new world needs to be focused more on how do we build a sustainable market."

The old world was about banks creating securitised debt and shovelling it into off-balance sheet vehicles, while the new world will be about non-bank originators and real economy investors, such as big asset managers, Medcraft said. (Reuters)

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