By Huw Jones
LONDON (Reuters) - Global regulators may ease restrictions on asset-backed or pooled-debt in a policy shift that banks and European policymakers say is needed if financial markets are to play a bigger role in funding economic growth, two financial industry sources said on Tuesday.
Pooled-debt or asset-backed securities (ABS) based on poor quality U.S. home loans were blamed for triggering the 2007-09 financial crisis, leading to tougher rules for these financial instruments.
This tarnished the asset-backed market that is roughly still only half its pre-crisis size in Europe, though it has rebounded in the United States.
The European Union is working on reforms of asset-backed securities to try to revive the market so it can contribute to funding for businesses that in Europe largely rely on banks for money. These reforms would seek to cut capital charges on high quality securitized debt.
Now the global Basel Committee of banking supervisors has also begun a fundamental review of how much capital banks should hold against assets such as pooled or securitized debt on their trading books.
This week it sent a questionnaire to banks to test the impact of lower capital charges on securitized debt based on high quality loans.
"They have lowered the capital requirements on securitization, which is going with the political wind," a senior European banking source who has read the questionnaire told Reuters.
Until now there has been no sign that global regulators were willing to follow the European Union's lead and thereby avoid fragmenting the asset-backed market, which currently operates as a global market, without regional constraints.
Basel's questionnaire follows calls in February from three lobby groups, the International Swaps and Derivatives Association, the Global Financial Markets Association, and the Institute of International Finance, for more flexibility on securitized debt.
The three trade bodies have said it is important to avoid making the product uneconomic at a time when political objectives in many countries focus on reviving the market and broadening the available sources of funding.
Basel's questionnaire is a sign of possible flexibility in its trading book review in other ways too. The questionnaire also tests the climate for ditching so-called "asymmetric correlations" or capital charges for covering less well-hedged positions in the asset-backed market.
Banks argued the original proposal could lead to unrealistically high capital charges for well-hedged positions as well.
"It looks much better," the banking source said of the latest questionnaire.
But the Basel committee is also testing opinions about a new capital charge to cover products that are not covered by broader rules on asset-backed securities.
Basel wants to wrap up work on its trading book review by the end of this year and then decide on when the changes must be introduced.
(Editing by Jane Merriman)