December 7, 2016 / 5:20 PM / 3 years ago

EU lawmakers move to revive asset and mortgage backed market

BRUSSELS (Reuters) - European lawmakers are set to give their first backing to a plan to revive the market for asset and mortgage backed securities on Thursday, the EU lawmaker responsible for the initiative said.

The famous euro sign landmark is pictured outside the former headquarters of the European Central Bank (ECB) in Frankfurt, Germany, July 17, 2015. REUTERS/Kai Pfaffenbach

Last year the European Union’s executive arm proposed loosening rules on securitization, the process through which banks pool and sell loans, in a bid to revive a 200 billion euro market that has fallen to about a quarter of its 2008 peak.

But this caused consternation among some European parliamentarians as the financial instruments involved were at the root of the 2007-08 global financial crisis.

Meanwhile, EU governments were behind the plan, which they see as an opportunity to boost bank lending to European companies and kickstart flagging economic growth in the region.

Under a compromise among the main political parties in the European Parliament, banks will be required to hold between 5 and 10 percent of the securitized debt they create, a threshold meant to discourage lenders from packaging too risky securities.

The Commission’s original proposal had set this at 5 percent, while the Parliament initially wanted 20 percent.

“It is a good compromise,” center-left Dutchman Paul Tang, told Reuters on Wednesday.

The economic affairs committee of the European Parliament will vote on the document on Thursday and Tang said there would be “a clear majority” in favor.

In an attempt to increase banks’ lending capacity while keeping risk under control, the plan also envisages lower capital requirements for securities that fall within a new category of “simple, transparent and standardized” (STS) debt.

Tang said the compromise increases sanctions for issuers who do not respect the stricter conditions to obtain the STS label.

The new text will need approval from EU governments and the European Commission, both of which fear overly strict conditions may dissuade banks from issuing new securities.

The Commission’s director general for financial services Olivier Guersent said in Brussels on Wednesday he was ready to accept a rate slightly higher than 5 percent, while Tang said 10 percent “is not prohibitive”.

However, the banking industry said the changes to the rules made no sense.

“Changes to the risk retention rules are being proposed in the absence of any evidence supporting change. They should be dropped,” Richard Hopkin, Head of Fixed Income at finance lobby group AFME, said.

Editing by Alexander Smith

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