The European Union (EU) has agreed on new measures to revive the region’s asset backed securities (ABS) market while imposing rules on the industry to minimise risk-taking, according to the Wall Street Journal.
The WSJ reports that following 18 months of discussions, lawmakers and EU governments reached a political agreement on a proposal from the European Commission (EC), the EU’s executive arm, as part of a plan to strengthen capital markets across the eurozone.
The paper notes that efforts to reduce European small businesses’ reliance on bank lending, which is much greater than in the US, has assumed a new importance as post-Brexit the UK, currently Europe’s capital markets hub, is set to leave the bloc by March 2019. The European Central Bank (ECB) has also worked to revive the ABS market in Europe.
The new rules cover all aspects of asset-backed debt, from origination of the assets to capital charges, supervision and risk retention. The centerpiece is a new class of so-called “simple, transparent and standardised” products eligible for preferential capital treatment.
Some EU lawmakers were wary of the commission proposal because the sale of mortgage-backed securities was a main contributing factor to the 2008 global financial crisis.
Among the obstacles preventing an agreement was the so-called retention rate, said the WSJ. Lawmakers wanted to force the original lender to hold a 20% stake in the securitised asset, to ensure that financial firms had an incentive to create safe products. Banks opposed such a high retention ratio and lawmakers eventually accepted the commission proposal of 5%.
The proposal, which must still be formally signed off, would also significantly tighten supervision of the sector, including creating a database repository system for all market transactions, to increase transparency and tighter oversight by the European Securities and Markets Authority (ESMA).
Edward Scicluna, Malta’s minister for finance and current holder of the EU’s rotating presidency, said that the agreement would allow the EU to relaunch the securitisation market, making it easier to lend to households and small businesses.
According to the commission, applying the securitisation package could release up to €150bn (US$168bn) of additional funding to the real economy. Members also noted that the worst-performing EU securitisation products with the highest possible triple-A rating defaulted in only 0.1% of cases at the height of the financial crisis, against a 16% default rate for their US equivalents.
The latest ranking from Swiss business school IMD sees the US ousted from the top three to its lowest position for five years.
A Capital One survey suggests that the majority plan to implement commercial card tools and services over the next year.
Despite objections from Germany, there will be greater powers to monitor testing and fine companies in the wake of the VW scandal.
A LexisNexis survey also suggests most financial crime professionals expect legacy technology to become a barrier to fighting financial crime over the next two years.