* Joint central bank paper is opening salvo before likely
* Asset-backed security market is impaired, shrinking,
* Paper calls proposed "catch all" rules "unduly
By Huw Jones
LONDON, April 11 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
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
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)