* ABS market collapsed after US subprime mortgage fiasco
* Securitisation could boost finance for smaller firms
* ABS need to be more transparent, credit data more
* UK banks and Moody's welcome plan, one investor sceptical
(Adds reaction from UK banks, investor and ratings agency)
By David Milliken and Eva Taylor
LONDON/FRANKFURT, May 30 The European Central
Bank and the Bank of England set out proposals on Friday to
resurrect the European Union's market for asset-backed
securities and help the flow of credit to smaller businesses.
Europe's ABS market has not recovered from the stigma
created by the global financial crisis, which was triggered by
doubts about the quality of assets in supposedly rock-solid U.S.
The ECB and the BoE aim to get European banks and investors
to agree common standards for safer ABS, which could help build
a stronger economy by providing credit to firms that are too
small to raise investment funds direct from capital markets.
"Securitisation can support greater funding diversification,
free up capital to allow banks to extend new credit to the real
economy, and provide ... insurance companies and pension funds
with access to a broader pool of assets," the BoE said.
Last month the two central banks said public intervention to
kick-start the market was needed and accused global regulators
of taking too tough a stance on the sector.
The proposals in a joint report issued by the ECB and the
BoE on Friday aim to reduce the risk of securitised debt by
limiting its tendency to concentrate risk in institutions vital
to the financial system, as well as to make their performance
"Involvement in this market by the authorities may be
desirable to support its revitalisation in a more robust form,"
the paper said, adding it was now seeking industry feedback.
In the short run, central bank input was needed to revive
the market, while in the longer term it would help stop a repeat
of the problems that caused the U.S. market to implode.
The ECB is getting increasingly concerned about banks'
ability to lend and support the euro zone recovery as credit
demand starts to pick up, pointing to the ABS market as a way to
funnel funding to the real economy, especially to smaller
The paper suggested following the model already adopted for
asset-backed securities eligible for central bank transactions,
which aims to identify products that are simple, robust and
transparent, enabling investors to accurately assess risks.
It also said they may warrant more generous treatment by
regulators than at present, and recommended that credit
registers which provide data on whether small firms default on
loans should be more open to lenders other than existing banks.
UK BANKS WELCOME PLANS
The British Bankers' Association (BBA) said it hoped
authorities would recognise that the market was being held back
by Solvency II rules for insurers.
"I think this (report) is very helpful," BBA Executive
Director Simon Hills told Reuters. "As the economy recovers,
alternative sources of finance for real-economy assets will have
to be found, and securitisation is the No. 1 choice."
Hills also said that the market was being held back by the
lack of investment banks able to provide the interest rate swaps
needed for many ABS to work.
Ratings agency Moody's also welcomed the paper. "The ECB and
the BoE do not provide ultimate solutions. But that's not their
role. What they do is they open the debate," Neal Shah, Moody's
structured finance managing director, told Reuters.
A more active securitisation market would open the door for
insurers or pension funds to provide funding to smaller firms,
which would otherwise be difficult for them.
But Aberdeen Asset Management - the type of investor which
the central banks hope will be enticed into the market - said
the details of the proposals were "riddled with inconsistencies"
and that it was too early to tell if the plan would work.
"The million-dollar question is still unanswered," said
Peter Winning, an investment manager at the firm. "How will they
distinguish between high quality securitisation that they want
to promote and the more funky stuff that caused problems in the
past that they want to discourage?"
Outstanding amounts in the market peaked at 2 trillion euros
($2.72 trillion) in Europe and $11 trillion in the United States
in the run up to the crisis but then contracted sharply, the
paper said. While the U.S. market has since recovered, this has
not been the case in most of Europe.
The BoE said that in Britain's case, securitisation could be
promoted by opening up current risk registers to lenders other
than banks. Current credit registers often restrict access, for
example by only being open to lenders which offered business
Bank lending to British businesses suffered its biggest fall
on record in the first three months of 2014 - despite a
strengthening economy, the BoE said.
In a separate paper, the BoE suggested Britain should bring
back a comprehensive register of all businesses, which was
scrapped in 1981, and use business tax records to bolster data
in existing credit reference files.
The joint ECB/BoE paper also raised doubts about whether it
was right to limit the maximum credit rating of an ABS to that
of the government of the country in which it was based.
"(This) may undermine transparency around the inherent
credit quality of securitisations," it said.
* To read the full reports, see here
($1 = 0.7345 Euros)
(Reporting David Milliken in London and Eva Taylor in
Frankfurt; Editing by Jeremy Gaunt and Susan Fenton)