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Banks set for asset-backed debt relief in EU market overhaul

European banks and investors will face looser capital and oversight rules for asset-backed debt as the European Commission seeks to help revive corporate lending.

[VIENNA] European banks and investors will face looser capital and oversight rules for asset-backed debt as the European Commission seeks to help revive corporate lending.

The European Union's executive body is seeking to cut the minimum risk weight on securitizations that qualify as simple and transparent by 5 percentage points to 10 per cent, according to a draft regulation obtained by Bloomberg News.

It will also allow banks to award a "simple, transparent and standardized" label, known as STS, to asset-backed securities without prior checks by supervisors, and lifts a burden on investors that had seen buyers responsible for monitoring whether originators retained a stake in an ABS.

The regulation is a centerpiece of the EU's planned capital markets union, which it sees as a way to revive the securitization market after the financial crisis and to get credit flowing toward small- and medium-sized companies.

"This proposal aims at restarting markets on a more sustainable basis so that simple, transparent and standardized securitization can act as an effective funding channel to the economy," according to the document. "Securitization can bridge banks and capital markets with an indirect benefit for businesses and citizens." The commission, which declined to comment, estimated in the draft that returning the EU's securitization market to pre- crisis levels would provide 100 billion euros (US$113 billion) to 150 billion euros in additional credit to households and businesses, a 1.6 percent increase.

As the Commission indicated in an earlier outline of its plans, short-term securitizations such as asset-backed commercial paper can qualify for the STS label as well.

The draft quantifies the new capital charges for banks, following the European Banking Authority's guidance on how to reduce capital charges for STS securities, published in July. The EBA said at the time the cuts would amount to a 25 per cent reduction on average from those set in December by the Basel Committee on Banking Supervision.

The cuts the Commission adopted from the EBA are across the board for ABS tranches, with various maturities and debt ratings. A similar equivalent reduction of charges for insurers in the EU's Solvency II rules will be fixed at a later date, according to the draft.

Banks that bundle their loans into securities according to the STS rules will have to notify regulators, but there will be no certification ahead of their sale.

"As regards compliance with the STS criteria, the most suitable mechanism identified is to ensure liability rests with originators and investors, reinforced by supervisory oversight," the draft says. "An ex-ante regulatory involvement of supervisors stating that a securitization meets the STS criteria would shift the responsibility to public authorities, leading to moral hazard risks." The effort to make securitization more attractive is part of a Europe-wide effort to make credit more accessible to smaller companies. It is backed by both the European Central Bank and the Bank of England.


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