ECB, BoE say public intervention needed to revive stigmatised debt market

Fri Apr 11, 2014 10:54am EDT

* Joint central bank paper is opening salvo before likely intervention

* Asset-backed security market is impaired, shrinking, stigmatised

* Paper calls proposed "catch all" rules "unduly conservative"

By Huw Jones

LONDON, April 11 (Reuters) - The European Central Bank and Bank of England said public intervention to kick-start the shrinking market for packaged debt is inevitable, and it accused global regulators of taking too tough a stance on the sector.

The two banks said in a joint paper that the asset-backed securities (ABS) market, which bundles loans into bonds, is impaired and unable to play a role in funding the economy.

Reform is needed to promote simpler, top quality ABS, they said, without the "stigma" that the sector set off the worst financial crisis in a generation in 2007, leading to colossal losses at banks that had to be bailed out by taxpayers.

The two central banks put Europe on a possible collision course with the Basel Committee of banking supervisors from around the world, which is due to finalise a rule on how much capital banks who create ABS must set aside against defaults.

Basel, which could not immediately be contacted for comment, has proposed a doubling of requirements from pre-crisis levels, a move lenders say makes creating ABS prohibitive.

The banks said in the paper that Basel's proposed rule is "catch all" and fails to apply capital treatments commensurate with the reduced risks in top quality ABS.

"The proposed changes arguably treat ABS in ways that might be perceived as unduly conservative," the central banks said.

"It would be important that the authorities seek to ensure that new regulations at global and EU levels do not act to the detriment of the securitisation market," they said.

They will present the paper to the Spring meeting of the International Monetary Fund and Group of 20 economies (G20) this weekend.

They offered no clear guide on how to define top quality ABS, however, leaving lenders worried about what happens to issuance left outside that bracket.

Simon Lewis, chief executive of banking lobby AFME, said time is running out for positive regulatory signals needed on upcoming regulation of the sector and urged greater coordination between supervisors in Europe and internationally. <***************************************************

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There is 1.5 trillion euros of ABS outstanding in Europe, mostly in Britain, the Netherlands, Spain and Italy. This total is only a quarter of the size of the U.S. market, and nearly 60 percent is based on home loans.

Basel, on which the ECB and BoE both sit, is already looking at how top quality ABS could be treated, but some of its other members would likely have qualms about scaling back its capital proposal to roughly the same level as in the run-up to the crisis.

Rules written by Basel have no standing in law with no sanctions for breaches, thus allowing the EU to push ahead regardless if the guidelines are not eased at the global level.

The two central banks said revitalising ABS issuance on any meaningful scale would require concerted policy action in various fields and involving a range of official entities.

They did not state any specific changes they have in mind but said a longer, more substantive joint discussion paper will follow in May.

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 and asset-backed securities debt.

Reviving ABS is also seen as helping to ease Europe's over-reliance on banks for funding companies and the economy.

French banks tested the waters for securities backed by loans to small and medium-sized companies on Friday, issuing 2.65 billion euros in notes as part of a pilot project encouraged by the Bank of France.

The ECB will become the supervisor for top lenders in the euro zone from November and could influence transparency and ABS underwriting standards at banks in the long run to help give investors more data to assess the market's credit risks. (Editing by Hugh Lawson)