By Paul Day and Huw Jones
BARCELONA Spain/LONDON (Reuters) - The European Central Bank may buy "simple and transparent" asset-backed securities (ABS) to help achieve its target of delivering price stability to the euro zone, ECB Executive Board member Yves Mersch said on Wednesday.
Asset-backed securities are created by banks pooling loans like mortgages or car loans into an interest-bearing bond that is sold to raise funds.
The ECB included the possibility of ABS purchases in a package of measures it announced last week to pump money into the sluggish euro zone economy.
In a speech entitled "Next steps for European securitization markets", Mersch said the ECB wanted a more holistic approach to the regulatory treatment of ABS in Europe and greater transparency of their treatment by ratings agencies.
"There is a growing consensus that an instrument once seen as part of the problem could in fact be part of the solution," he said of talks about ABS in European policymaking circles.
Europe's ABS market has not recovered from the stigma created by the global financial crisis, which was triggered by doubts about the quality of assets in supposedly rock-solid U.S. mortgage-backed securities.
The ECB and the Bank of England aim to get European banks and investors to agree common standards for safer ABS, which could help build a stronger economy by providing credit to firms that are too small to raise investment funds directly from capital markets.
"We have to work in tandem with the markets, see what the market reaction is," Mersch said of ECB preparations to buy ABS.
"Obviously we will not go into the area of buying the equity tranche. Anything else beyond has to be seen to be under discussion," he told a conference organized by European banking lobby AFME.
Substantial efforts are under way to improve transparency and disclosure requirements of ABS across the EU, Mersch said.
Nomura bank has said the European securitization market is about 650 billion-700 billion euros, half its pre-crisis size.
Earlier this week AFME said the ECB and BoE must turn talk of reviving the ABS market into speedy action by easing what they see as punitive capital rules planned for the sector.
Separately on Wednesday, Andreas Dombret, the Bundesbank board member responsible for banking supervision, said it was up to the market and not public authorities to revive the sector.
"First and foremost it's a job for the industry itself," Dombret told reporters during a visit to London.
"One should not always call for the public sector to be in the forefront when it should be in the interests of the market itself to revitalize that," Dombret said.
Greg Medcraft, Chairman of the International Organization of Securities Commissions (IOSCO), a regulators' association, said the biggest challenge for an ABS market revival was to get institutional investors to buy into it, rather than necessarily giving banks more incentives to take part.
"One of the problems was that it was always too easy to sell to banks," Medcraft said in an interview.
BASEL TOO SLOW?
The ECB and BoE are seeking to create a clearly defined category of high-quality ABS that would benefit from more lenient capital charges for banks than planned under global rules from the Basel Committee of banking regulators.
Mersch said he did not believe that Basel would rush to define high-quality ABS any time soon.
Should it become clear that it would take too long to improve the regulatory requirements for ABS on a global scale, Mersch said Europe could go it alone.
"So if we see the global approach will not be conducive to helping the recovery in the European economic area, we would have to consider whether a more European approach would be helpful," Mersch added.
Andrea Enria, chairman of the European Banking Authority, an EU watchdog that writes rules for lenders, said Basel was in the "driving seat" when it comes to capital charges on ABS.
"The point is not about bringing down the charges, it's whether to distinguish between different classes of ABS and securitization, whether this means that the capital treatment can be adjusted accordingly," Enria told reporters in London.
The EBA will also give the EU advice by September on capital treatment of securitization, Enria added.
Banks worry that once a definition of "simple and transparent" ABS is agreed then the rest of the market could be shunned by investors.
Greater standardization of ABS products is key to stimulating greater activity in the market, he added. He suggested streamlining reporting requirements or providing standardized ABS prospectus templates.
IOSCO's Medcraft, a former securitization banker, said the ECB's possible ABS purchases could help shape market standards and bring about more transparency.
"When the ECB does these things, it can drive disclosure requirements," he said.
Mersch also called for ratings agencies to provide more transparency on how they derive ratings for ABS products.
(Reporting by Paul Day; Additional reporting by Sarah White in Madrid; Writing by Paul Carrel; Editing by Toby Chopra)
- Budget, Tax & Economy
- Yves Mersch
- European Central Bank