By BORIS groendahl and alastair marsh
Short-term securitizations may qualify for preferential capital treatment in Europe as policy makers broaden their drive to revive the asset-backed debt market in response to prompting from banks and asset managers.
In the European Union plan for overhauling the securitization market, asset-backed commercial paper with an original maturity of a year or less could be eligible for the “simple, transparent and standardised” label that opens the door to capital relief, according to an undated draft of the European Commission’s plan.
When the commission, the EU’s executive arm, proposed its high-quality asset-backed securities plan in February, it sought views on whether to include asset-backed commercial paper for the first time. In response, UniCredit SpA, BlackRock Inc. and others argued that admitting ABCP would benefit corporate lending.
“The vast majority of ABCP is designed to provide funding to the real economy by funding assets such as trade receivables, which is exactly what regulators want,” said Jean David Cirotteau, senior ABS analyst at Societe Generale SA in Paris. “They absolutely should be included in the class of securitizations eligible for better treatment.”
EU financial-services chief Jonathan Hill proposed the ABS overhaul along with the commission’s Capital Markets Union plan, which aims to boost financing for smaller companies and long-term projects to fuel economic growth. Hill has promised to deliver an “action plan” next month, followed by “a comprehensive package on securitization.”
Basel Rules
That package will include “updated calibrations” of the capital requirements for ABS in the relevant laws for banks and insurers, the Capital Requirements Regulation and Solvency II.
The working paper says CRR will be changed “in line with the advice provided by the European Banking Authority,” which has called for capital requirements on high-quality ABS to be set an average of 25 percent below levels for other products set in December by the Basel Committee on Banking Supervision. The commission objected at the time that the Basel rules would significantly increase requirements even for highly rated products and should be reviewed.
Hill has also signaled that qualifying securitizations will receive more favourable capital treatment in Solvency II, something investors say is crucial for the EU’s ABS revival to succeed.
“Unless changes are made imminently, it is very unlikely that insurance companies will ever buy ABS again,” said Frank Erik Meijer, The Hague-based head of ABS at Aegon Asset Management.
Synthetic
Securitisations
The commission document doesn’t go so far as to make synthetic securitisations, in which credit derivatives are used to transfer risk, eligible for the high-quality label as the industry had sought.
Complex securitizations helped fuel the financial crisis by making it harder for investors and supervisors to understand cash flows and where risks were hidden. The crisis also underlined the importance of strong underwriting in originating the underlying assets and of governance, as well as the importance of giving buyers the tools to carry out their own assessment of the risks.
The European market for ABS was brought close to extinction in the financial crisis, and it has been slow to recover, even after the European Central Bank began purchasing the securities last year.
Issuance in 2014 amounted to 216bn euros ($241bn), down from a high of 819bn euros in 2008, according to data from the Association for Financial Markets in Europe, which include bonds sold to investors as well as those retained by banks to use a collateral for central bank funding.
Admitting simple and transparent asset-backed commercial paper for preferential regulatory treatment goes beyond the Basel group’s criteria for “simple, transparent and comparable” securitizations, issued last month.
Bloomberg
By BORIS groendahl and alastair marsh
Short-term securitizations may qualify for preferential capital treatment in Europe as policy makers broaden their drive to revive the asset-backed debt market in response to prompting from banks and asset managers.
In the European Union plan for overhauling the securitization market, asset-backed commercial paper with an original maturity of a year or less could be eligible for the “simple, transparent and standardised” label that opens the door to capital relief, according to an undated draft of the European Commission’s plan.
When the commission, the EU’s executive arm, proposed its high-quality asset-backed securities plan in February, it sought views on whether to include asset-backed commercial paper for the first time. In response, UniCredit SpA, BlackRock Inc. and others argued that admitting ABCP would benefit corporate lending.
“The vast majority of ABCP is designed to provide funding to the real economy by funding assets such as trade receivables, which is exactly what regulators want,” said Jean David Cirotteau, senior ABS analyst at Societe Generale SA in Paris. “They absolutely should be included in the class of securitizations eligible for better treatment.”
EU financial-services chief Jonathan Hill proposed the ABS overhaul along with the commission’s Capital Markets Union plan, which aims to boost financing for smaller companies and long-term projects to fuel economic growth. Hill has promised to deliver an “action plan” next month, followed by “a comprehensive package on securitization.”
Basel Rules
That package will include “updated calibrations” of the capital requirements for ABS in the relevant laws for banks and insurers, the Capital Requirements Regulation and Solvency II.
The working paper says CRR will be changed “in line with the advice provided by the European Banking Authority,” which has called for capital requirements on high-quality ABS to be set an average of 25 percent below levels for other products set in December by the Basel Committee on Banking Supervision. The commission objected at the time that the Basel rules would significantly increase requirements even for highly rated products and should be reviewed.
Hill has also signaled that qualifying securitizations will receive more favourable capital treatment in Solvency II, something investors say is crucial for the EU’s ABS revival to succeed.
“Unless changes are made imminently, it is very unlikely that insurance companies will ever buy ABS again,” said Frank Erik Meijer, The Hague-based head of ABS at Aegon Asset Management.
Synthetic
Securitisations
The commission document doesn’t go so far as to make synthetic securitisations, in which credit derivatives are used to transfer risk, eligible for the high-quality label as the industry had sought.
Complex securitizations helped fuel the financial crisis by making it harder for investors and supervisors to understand cash flows and where risks were hidden. The crisis also underlined the importance of strong underwriting in originating the underlying assets and of governance, as well as the importance of giving buyers the tools to carry out their own assessment of the risks.
The European market for ABS was brought close to extinction in the financial crisis, and it has been slow to recover, even after the European Central Bank began purchasing the securities last year.
Issuance in 2014 amounted to 216bn euros ($241bn), down from a high of 819bn euros in 2008, according to data from the Association for Financial Markets in Europe, which include bonds sold to investors as well as those retained by banks to use a collateral for central bank funding.
Admitting simple and transparent asset-backed commercial paper for preferential regulatory treatment goes beyond the Basel group’s criteria for “simple, transparent and comparable” securitizations, issued last month.
Bloomberg
