August 22, 2014 / 5:20 PM / in 3 years

EU sets out roadmap to boost securitised debt market

LONDON, Aug 22 (Reuters) - The European Union will decide next year if legal changes are needed to boost the market for securitised debt, a sector seen as key to injecting funds into the economy and encouraging growth, an EU document showed on Friday.

The document is another indicator that concern over the level of funding to the EU economy, particularly in the flagging euro zone, has reached the highest political level.

The “Roadmap for Securitisation”, drawn up for the bloc’s finance ministers and seen by Reuters, says the recent economic and financial crisis had considerably reduced funding to the real economy.

The European Central Bank (ECB) is also mulling purchases of securitised debt such as asset-backed securities to help boost euro zone growth.

Securitisation, which turns pools of loans into interest-bearing bonds to help raise further funds, has dwindled in Europe due to the 2007-09 financial crisis.

The market was tarnished by the so-called sub-prime crisis, when securitised debt based on poor-quality U.S. home loans became untradable in 2007, sowing the seeds for the ensuing global financial crisis.

The document, which EU finance ministers will discuss at a meeting in Milan next month, lists 19 initiatives underway in Europe and globally to kick-start securitisation.

The EU’s executive European Commission is the best body to coordinate work on these initiatives, the document says.

The Commission, along with the ECB and the bloc’s markets, insurance and banking watchdogs, should review progress before the end of 2015, it added.

“The review should help identify persisting shortcomings and should help inform any further action where needed, including the merits of an EU harmonised framework,” the document said.

The ECB and the Bank of England have already called for steps to boost “high quality” securitisation, noting the high capital charges on banks who issue securitised debt, and on insurers who buy it, are key impediments to the market.

Such a segment could be more leniently treated from a capital charges point of view.

But banks are worried about how the authorities will define “high quality”, fearing the rest of the market will be permanently shunned by investors.

“A key ... step will be to agree at EU level upon the most appropriate criteria to designate ‘sound’ or ‘qualifying’ securitisation instruments across the board,” the document said.

These criteria could be included in the bloc’s new capital rules for insurers, and in new rules requiring banks to hold a buffer of bonds, including some debt backed by home loans, to withstand short-term shocks, it added. (Editing by David Holmes)

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