Looser European capital rules for asset-backed debt on the way

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 securitisations that qualify as simple and transparent by 5 percentage points to 10 per cent, according to a draft regulation obtained by Bloomberg.

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 securitisation 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 standardised securitisation can act as an effective funding channel to the economy,” according to the document. “Securitisation 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 securitisation market to pre- crisis levels would provide €100 billion to €150 billion in additional credit to households and businesses, a 1.6 percent increase.

Bloomberg