Central banks call for lower capital requirements on top-quality pooled debt

Fri Mar 27, 2015 9:15am EDT
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By Huw Jones

LONDON (Reuters) - Bonds based on high-quality loans should benefit from lower capital requirements to kick-start the market in Europe, the Bank of England and European Central Bank (ECB) said on Friday.

The two central banks were responding to plans from the European Union's executive, the European Commission, to revive the asset-backed securities (ABS) market to improve funding for companies.

Such securitization involves the pooling of loans such as mortgages, with the interest providing income for the buyer of the bond.

The European Commission has proposed a new category of "simple, transparent and standardized" (STS) bonds to give investors confidence in a sector tarnished by the 2007-09 financial crisis.

The crisis was sparked by ABS based on "sub-prime" U.S. home loans that turned toxic, and though the sector has rebounded in the United States, it remains subdued in Europe.

The Bank of England and ECB's joint response to the Commission's plans called for "appropriate prudential recognition", meaning less than the current level of capital that has to be retained against ABS held by banks or bought by insurers.

"That recognition should reflect the lower risk profile of such transactions relative to non-STS transactions," their joint statement said.

The global Basel Committee of banking supervisors is considering whether high-quality ABS should benefit from lower capital requirements.   Continued...

Pedestrians walk past the Bank of England in London March 5, 2015.   REUTERS/Suzanne Plunkett