* IOSCO's Medcraft says tarnished sector needs re-inventing
* Changes in capital charges not seen as silver bullet
* Europe's impatience not shared in Asia, United States
* Bankers fear unilateral changes could damage revival
By Huw Jones
LONDON, Sept 2 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
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.
NEW WORLD BRIEFING
Medcraft will brief leaders of the Group of 20 economies
(G20) in November on joint work by IOSCO and the global Basel
Committee of banking supervisors to identify blockages in the
securitisation market. Their recommendations will be put to a
public consultation early in 2015.
Medcraft said a revived market would be based on simple,
transparent and consistent products, a goal that has proved
elusive in the past due to the lack of common approach to how
the quality of assets underpinning ABS are assessed.
Anna Bak, securitisation manager at the Association for
Financial Markets in Europe (AFME), a banking trade body, said a
comeback in Europe won't happen overnight despite the ECB push.
Industry efforts to introduce a "quality label" on ABS has
floundered with lawyers saying this was because regulators did
not agree to cut capital charges on this segment.
"We think the market will be healthier three to four years
from now. It will be different, the investors will change and
people will go for simpler products," Bak said.
"The signals from senior officials are very helpful but
there are still many institutions involved and there needs to be
a consistent message and implementation, which takes time," Bak
Cheap funding for banks from the ECB dulls the incentive to
offer ABS, and the central bank could offer even more as soon as
this month and going into next year.
"As long as central banks offer cheaper liquidity to banks,
it's going to suppress securitisation," Bak said.
And while there is well over a trillion euros of European
securitisation in issue, over half is "retained" or tied up as
collateral, such as by banks to back cheap loans from the ECB.
Nomura bank expects the ECB to buy 50-100 billion euros of
ABS over a year and with the ultimate amount depending on its
confidence in how much new issuance will be developed.
AFME wants regulators to work together and avoid differences
in capital charges that unilateral European action could create.
The bloc is already poised to bend global rules on new
buffers of top quality bonds at banks to favour more use of ABS
and also of competing covered bonds.
But the region's sense of urgency is not shared by the
United States or Asia, making it hard to engineer rapid reform
on a global basis to avoid fragmenting the market.
The Basel Committee is set to ease its planned bank capital
charges on securitised debt later this year but is not expected
to push them even lower for top quality ABS as Europe wants.
"The market said they did not want us necessarily to reduce
capital charges. What they said is that they want neutrality, a
level playing field that does not necessarily discriminate
against or favour securitisation," said Medcraft, who also
chairs Australian market watchdog ASIC.
Another regulatory source said that even bankers admit that
complexity of issuance and a thin pipeline of assets to
securitise were more of an impediment to reviving the market
than concerns over capital charges.
(Editing by Anna Willard)