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Coeuré`s affair of the heart with ABS

At a time where regulation is often not in tune with commercial necessity, a significant arrangement is underway for asset-backed securities (ABS). Benoît Coeuré, executive board member of the ECB, draws upon a joint Discussion Paper from the Bank of England and the ECB to advocate for a favourable regulatory treatment for “Qualifying securitisation”.

The action of ECB is motivated by the urgent need to add strings to quantitative easing`s bow. It is ECB`s view that ABS would support real economy lending by banks and non-banks.

As a positive indication of commitment in early June, the ECB announced that the option of outright purchases in the ABS market was among a range of measures designed to boost credit supply. Since then, the ECB confirmed that it will start buying ABS as early as October.

The next step is to stimulate supply and demand of ABS in the private market. In order to achieve this result, the ECB favours regulatory changes in order to make securitisation more palatable for issuers and investors alike. Both the reduction of requirement for regulatory capital and the reduction of haircut when ABS is posted as collateral are likely to act as sweeteners to ensure a better match for the private sector. The international and European developments include:

  • G20 Retention principles, via CRR, delegated regulation published in the OJ on 13 June 2014
  • BCBS Capital requirements, consultation on revision to the securitisation framework ended on 21 March 2014.
  • BCBS Liquidity requirements, via CRR. Delegated acts expected for 30 June 2014, but delayed to September 2014 to clarify the definition of “high quality securitisation”.
  • Solvency II, capital requirements and risk management standards for the insurers, similar adjustments are being considered by the European Commission

For the moment, the ECB will limit its purchase program to the senior tranches of an ABS. Nonetheless, Coeuré does not hide his ambitions to approach the riskier tranches of ABS, providing there is a guarantee from entities such as the European Investment Bank (EIB) or European Investment Fund (EIF).

This extra commitment is controversial, since heading this way would mean that taxpayers foot the bill if ABS go sideways.

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