Barclays analysts believe the regulators will find it hard to ignore a call last week by the European Central Bank (ECB) and Bank of England (BoE) to ease the rules governing securitization activity in Europe.
But they expect the changes to be gradual, even though the central banks pushed for immediate action in a paper on securitization drafted for the IMF spring meeting.
The paper appears to cement an improving perception of securitization — or at least certain kinds of securitization — in Europe. The European Commission made a pledge in late March to distinguish between high quality securitizations and lower quality ones.
Similar, in their paper the ECB and BoE officials said they want to “level the playing field between high quality’ and other asset classes with similar risk profiles,” Barclays analysts said in a report today.
They pointed out, however, that the paper does not define which securitizable assets are considered “high quality.” But it does discuss the low default rates of consumer finance ABS, RMBS, and SME CLOs.
This last asset class is very much on the minds of European policymakers and politicians. An increasing number of them endorse securitization as way for banks to boost lending to small and medium companies and still meet their regulatory capital requirements.
Indeed, the BoE and ECB officials who penned the paper see regulations as a potential roadblock to more activity in high quality’ securitizations.
The authors of the paper consider “the capital charge for high-quality ABS to be high compared with similar asset types. In particular, they highlight the disparity in treatment of ABS versus covered bonds under the liquidity coverage ratio (LCR) as a key issue,” according to the Barclays analysts.
The analysts said new policies are likely to focus more on boosting issuance placed with private-market investors rather than finding ways to increase volumes placed with central banks. “The discussion paper did not consider an asset purchase plan for ABS,” the analysts said. “The paper states that banks, insurers, and pension funds are the major participants in the securitization market, and that their ongoing participation is vital for a functioning market.”
The paper by the central banks prefigures a more substance’ paper in May.