LONDON/FRANKFURT 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. mortgage-backed securities.
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.
"Securitization 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 securitized debt by limiting its tendency to concentrate risk in institutions vital to the financial system, as well as to make their performance more predictable.
"Involvement in this market by the authorities may be desirable to support its revitalization 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 companies.
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.
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The British Bankers' Association (BBA) said it hoped authorities would recognize 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 securitization 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 securitization 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 securitization 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, securitization 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 current accounts.
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 secularizations," it said.
(Reporting David Milliken in London and Eva Taylor in Frankfurt; Editing by Jeremy Gaunt and Susan Fenton)