LONDON (Reuters) - Global regulators have eased the rules on the issuing of securitised debt, a type of security blamed at least in part for causing the last financial crisis, boosting Europe’s efforts to revive a moribund market for companies seeking to raise funds.
The Basel Committee of banking regulators from the world’s main financial centres said it has updated its rules for securitisation to favour higher grade issuance.
Securitised debt originating from poor quality U.S. “sub-prime” mortgages, sowed the seeds of the 2007-09 financial crisis after homeowners defaulted, depriving the securities of payments to investors.
But Basel has now changed the rules to filter out “simple, transparent and comparable” securitised debt whose underlying assets are typically of a higher quality.
“This ensures that securitisations with higher-risk underlying exposures do not qualify for the same capital treatment as simple, transparent and comparable (STC) compliant transactions,” Basel said in a statement.
It has cut the “risk-weighting” or minimum amount of core capital banks must hold against STC debt to 10 percent from 15 percent.
Europe wanted changes from Basel to underpin its own plans to revive the market.
“It sounds like a welcome step in the right direction,” said Richard Hopkin, managing director for securitisation at AFME, a European banking trade body.
The market in the United States has recovered since the financial crisis, but issuance in Europe remains around 100 billion euros annually or a quarter of pre-crisis levels.
Hopkin said other steps were needed, such as smoothing out differences in capital charges between securitised debt and more favoured covered bonds.
There was also a need to cut capital requirements imposed on insurers who could invest in securitised debt, Hopkin said.
The European Union is approving a new law to make simple and transparent securitised debt more attractive as a way for companies to raise funds instead of relying on bank loans.
However, some lawmakers are worried that lessons from the financial crisis have not been learned and it could be many months before the law is passed.
“Many investors have left the moribund market. It’s critical to revive securitisation in Europe to get non-banking investors back,” Hopkin said.
Reporting by Huw Jones; Editing by Greg Mahlich