LONDON May 22 European Union regulators have proposed tighter safeguards on sales of the type of securitised debt that became untradable in the financial crisis, forcing taxpayers to rescue banks.
Securitisation is the consolidation of loans such as mortgages and credit cards and selling them as bonds to investors, with loan repayments paying the interest.
When such bonds based on sub-prime U.S. home loans became untradable in 2007, a global crisis unfolded to engulf lenders who held the bonds.
The securitisation market has remained moribund since then and its revival is seen by policymakers as key to funding sluggish economic growth and weaning lenders off cheap central bank money.
The European Banking Authority (EBA) on Wednesday published draft rules for consultation that toughen up from 2014 existing guidelines for preventing a recurrence of the sub-prime debacle.
The rules, to be applied across the EU, will lay down how regulators supervise the market, ending the current system which allows some market participants more flexibility.
The EBA said the rules will reassure investors that securitised debt is less likely to become untradable.
Sellers of the debt must keep a 5 percent portion of the issue as an incentive to keep issuing standards high.
Banks that buy securitised debt and fail to check the seller has complied with the new safety rules will get an automatic 250 percent penalty capital surcharge on the purchase.
The 5 percent slice in future can only be retained by the originator, sponsor or original lender, with no third party allowed to do this as some supervisors currently allow.
The watchdog said this rule will hit the managed collateralised loan obligation (CLO) sector which pools payments on many business loans. Issuance between 2009 and 2011 was only 3 billion euros, compared with 130 billion in September 2007 alone.
Most CLO managers would struggle to come up with the resources to fulfil the retention requirements, EBA said.
This month the European Central Bank decided to start talks with the European Investment Bank and the EU Commission on reviving the asset-backed securities market.
But banks see a contradiction between such support from top policymakers and tougher rules from regulators on the ground.
The Association for Financial Markets in Europe (AFME), a banking industry body, said issuance of securitised debt in Europe fell to 70 billion euros last year from nearly 90 billion in 2011 and 400 billion in each year prior to the financial crisis.
"Several senior policymakers have reiterated their support for securitisation but it is crucial that these high level expressions of support are translated into sensibly calibrated evidence-based regulation on the ground," AFME's head of capital markets, Rick Watson, said.