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Bank of England to take fresh look at securitisation market

By Huw Jones

LONDON (Reuters) - The Bank of England said it may step in to kickstart the securitisation market, which was discredited by the U.S. subprime crisis but is now seen as a valuable option for financing business growth.

Securitisation, where banks bundle pools of loans and sell the resulting package to raise funds for lending, has tumbled in Europe from $1.2 trillion in 2008 to $322 billion last year.

Such securities, backed by poor quality U.S. home loans, turned toxic in 2007 when the underlying mortgages defaulted, triggering the global financial crisis with banks having to be rescued by taxpayers.

"The Financial Policy Committee intends to assess, and where necessary act, to develop approaches to promote a better functioning securitisation market in the United Kingdom," the British central bank said in its Financial Stability Report on Thursday.

It said the availability of cheap central bank money for banks and uncertainty over the final shape of new regulation for the sector partially explained the market's muted recovery.

There could also be impediments such as lack of standardisation in information about how the assets are performing, it added.

The European Central Bank is also keen to see a revival, fearing that the combined impact of new regulation will hamper this.

In a nod to longstanding concerns at banks, the report signalled a change of tone under the BoE's new governor, Mark Carney, from his predecessor Mervyn King, a hawk on regulation.

It said regulatory reform since the financial crisis has focused on many areas but there was a need to fully understand the collective impact on the wider financial system and on funding to the economy.

Some new rules require derivatives and other contracts to be backed by more collateral in case of default, but this could result in a system that accentuates market swings, an effect known as procyclicality and witnessed to alarming effect during the financial crisis.

"There is also a need to examine the cumulative impact of regulatory reforms on the resilience of liquidity in financial markets that are important to UK financial stability," it said.

"Actions may need to be taken to offset the unintended consequences of ongoing regulatory reforms on procyclicality in the availability of finance," the BoE report added.

(Reporting by Huw Jones; Editing by Ruth Pitchford)