EU banks, investors push EU to fix flaws in ABS revival plan

[LONDON] European Union efforts to revive the asset- backed securities market and boost financing for small businesses could falter if repairs aren't made to its plan for a new class of "simple, transparent and standardized" products, some of the biggest financial firms in the 28-nation bloc said.

The EU's proposal, which offers preferential capital treatment to qualifying securitizations, needs to be brought into line with existing prudential rules for other investments of comparable risk, according to a joint note issued by banks and asset managers including HSBC Holdings Plc and BlackRock Inc.

"As a car manufacturer said in this context, just because you've got 90 per cent of the pieces you need in the motor doesn't mean that the car is going to go at 90 per cent of the expected speed," said Ian Bell, head of the London-based Prime Collateralized Securities initiative. "The proposal still has missing elements - without those key missing elements, the otherwise positive project is at risk of failing completely."

The thirty-two signatories to the note, also including UniCredit SpA and Banco Bilbao Vizcaya Argentaria SA, said the EU's plan could cause an "arbitrary division" between currently available securities and those issued under the new standards, which in turn would "cause losses to conservative investors for no discernible prudential benefit" at a time when EU markets remain fragile. The group recommended "simple, short-form rules" to help the new framework align with existing securities that meet most of the EU's goals.

"If regulations unfairly penalize one type of investment compared to others whose credit and systemic risks are similar, investors will go to the less regulated or cheaper equivalent instruments," the group said. "This results in moral hazard, regulatory arbitrage and an absence of interest in the penalized financial instrument."

Jonathan Hill, the EU's financial-services chief, presented the asset-backed debt plan in September in a bid to deliver as much as 150 billion euros of new lending and diversify funding sources for companies traditionally reliant on banks. By bundling assets and selling them on as securities, banks can free up balance-sheet capacity to offer new loans to companies, according to the plan.

EU member states reached a negotiating position on the bill late last year. Once the European Parliament settles on its own stance, talks will begin on a final draft of the legislation.

The finance firms said that "because of the multiplicity of rules and the complexities of markets, as well as the traditional regulatory approach of not providing ex ante clearance," investors could face "severe consequences" if asset- backed debt believed to qualify for lower capital charges under the EU plan were later disqualified "on very narrow technical grounds."

They urged policy makers to take steps to avoid "cliff effects" with severe consequences that would scare off investors. It also said the EU should aim for a "single point of interpretation" of the new standards, to avoid differences among national regulators.

The EU also should make technical changes to prevent whole classes of consumer loans from being left out of the new framework, the group said. By allowing a "reasonable low limit" of technically defaulted car and credit-card loans, the EU could head off a slate of "unwelcome and unintended" consequences, it said.

Other proposed changes include streamlining the due diligence process, so that some end-investors could delegate their research duties to regulated intermediaries, and adjusting the calibration of new capital requirements. For asset-backed commercial paper, the group recommended either eliminating or substantially extending a proposed maturity cap for qualifying securities.

The European Banking Federation, one of the letter's signatories, called for more coordination between the EU plans and a similar effort from the Basel Committee on Banking Supervision, in a separate comment letter posted on EBF's website. It urged the Basel committee to consider allowing some synthetic securitizations to qualify as simplified products, as the EU has proposed, and it also called for some sort of internationally recognized way to certify securities issued under new standards.

"In order to overcome the current stigma associated with securitization, certainly in Europe, it is necessary that investors are able to rely on a binding certification issued by an independent third party," EBF said, urging the Basel committee to consider use of a supervised external verification agent, as proposed by the EU.

BLOOMBERG