UPDATE 1-Global watchdog tries to kick start securitisation

Mon Mar 8, 2010 11:01am EST

(Recasts with Draghi on securitisation market, 'too big to fail' banks)

By Krista Hughes and Tamora Vidaillet

BASEL, Switzerland, March 8 (Reuters) - Global regulators are coordinating efforts to kick start the moribund debt securitisation market under tighter rules to aid recovery, the Financial Stability Board said on Monday.

The credit crunch turned subprime mortgage and similar debt securities toxic and untradable from 2007, saddling banks with such massive writedowns that taxpayers had to bail them out.

"We are looking at how to re-start securitisation channels," Mario Draghi, chairman of the Financial Stability Board, told a news conference.

Securitisation is the bundling of debt such as home loans into securities to raise finance. Asset-backed mortgages turned sour after U.S. home owners were unable to repay underlying loans, triggering a chain reaction.

But with government debt ballooning and banks having to use profits to increase capital levels, regulators increasingly accept there are few alternatives to restarting securitisation for raising funds for the economy.

"This is proving to be a serious drag on the re-starting of credit flows to the real economy," said Draghi who also heads the Italian central bank.

The FSB has been tasked by the G20 group of leading economies to coordinate national regulatory responses to the financial crisis.

The G20 has agreed last year on requiring contracts to be more standardised so they can be centrally cleared and even traded on an exchange to cut risk and improve transparency.

"Today, if we were able to have a securitised contract it would be a very different contract from the ones we had 2-3 years ago," Draghi said.

"Private sector bodies are now 100 percent on board in making securitisation viable because they know people will not touch this paper," he added.

TOO BIG TO FAIL MENU

The need to kick start securitisation is pressing as large chunks of corporate and bank debt will have to be rolled over in the next 2-3 years, Draghi said.

"One way is to have very simple intermediaries who do only one thing, issue securitised things ... We are working on how we can re-incentivise the banking sector towards longer maturities," Draghi added.

Last week Britain's Financial Services Authority, an FSB member, said it was in talks with the UK Treasury and Bank of England on rules to revive Europe's main securitisation centre.

A key challenge is to keep products tradeable under stress so investors have confidence to buy them, the FSA said.

Central bankers were meeting at the Bank for International Settlements to review progress on the G20's regulatory pledges.

Draghi expects the draft Basel III global accord on tougher bank capital to be finalised by year end as planned. Some countries want elements of the package watered down.

Policymakers have expressed concerns that national initiatives such as the Volcker Rule in the United States to crack down on proprietary trading hamper G20 efforts.

"I know it's been said but I would not agree. We have an agenda and the agenda is proceeding exactly on time according to the G20 directions," Draghi said.

The FSB has yet to reach consensus on how to deal with "too big to fail" banks so they won't be bailed out in trouble.

Solutions could include higher capital requirements for big banks, special liquidity guidelines or a tax on banks.

"To expect that on this issue we could have one measure only for the whole world would be impossible. We have absolute commonality of objectives but ... a menu of instruments," Draghi said.

"It's going to be a mix of mandatory and non-mandatory with a sound floor so as to avoid the race to the bottom," he added.

The FSB will present an interim report on 'too big to fail' to the G20 in June and final recommendations at the end of October.

(Writing by Huw Jones; Editing by Ruth Pitchford)

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