LONDON The Bank of England may try to revive the securitised debt market to support the economic recovery, a policymaker said on Friday, in the latest sign that products that triggered the financial crisis are being brought in out of the cold.
Clara Furse, a member of the British central bank's Financial Policy Committee, said small firms are finding it hard to get loans from banks focused on meeting tougher capital requirements following the 2007-09 financial crisis.
Expanding market-based finance, such as raising money by issuing securitised debt, would broaden the funding options for such companies, Furse said in her first speech since joining the committee a year ago. The FPC monitors risks in the broader financial system.
While large companies can issue bonds to raise money, smaller firms - which make up the bulk of the economy - rely more on bank lending. But with banks reluctant to extend loans due to tighter capital rules, policymakers across Europe now believe that securitising or repackaging debt, such as loans to companies, could provide the answer.
Furse said the FPC would assess and where necessary act to promote a better-functioning market in Britain for securitisation, which bundles loans into bonds.
Securitised debt has shrunk after a corner of the market based on subprime U.S. home loans became untradable in 2007, sparking a global meltdown in markets and a banking crisis.
Reviving the sector is seen as core to weaning the European economy off its reliance on banks to fund the economy.
"Non-bank and market-based finance widen participation and enhance diversity in the financial system," Furse said in a speech in Liverpool and made available to the media.
Furse, a former chief executive of the London Stock Exchange, said greater diversity among investors also tends to reduce the likelihood of everyone responding in the same way in rocky markets.
Her comments come a day after the European Union's executive European Commission put reviving securitisation at the heart of its plans to boost market based finance in the 28-country bloc to raise funds for new infrastructure and nurse start-ups.
Brussels will have a bigger impact on the fate of securitisation than the Bank of England as regulation for the sector is approved at the EU level.
EU financial services chief Michel Barnier said banks will benefit from an easing in capital charges on the securitised debt they hold, and insurers will likewise enjoy lower capital requirements when they buy it.
Regulation alone won't be the answer to reviving market-based finance but it can be a complement for trust which will depend on companies setting high standards, Furse said.
The European Central Bank has also said there is a need to expand top quality securitisation to fund small companies and wean banks off the vast amounts of money it has lent them to recover from the crisis.
Furse did not spell out any actual steps the BoE might take but said a credit register, which logs information on smaller companies looking for private money, might be useful.
"The wider Bank and the FPC will examine these issues over the next 12-18 months. This targeted approach to market-based finance is timely, sensible, proportionate and constructive," she said.
Like the European Commission on Thursday, Furse also singled out the hurdles to market-based finance created by an accounting requirement to price assets at the going rate, creating volatility which is a disincentive to investment, Furse said.