Tags: Europe | toxic | debt | securitized

Toxic Debt Condemned in Crisis Heralded as Europe's Savior

Friday, 11 April 2014 10:58 AM

Asset-backed securities were denounced for causing the financial crisis. Now the debt is being seen as a savior for Europe’s economy.

The European Central Bank signaled this week that plans to ward off deflation may center on asset-backed securities, while policymakers are promoting an expansion of the market. The efforts come as sales of the bonds fell to $102.5 billion in Europe last year from $449 billion in 2007 and less than the $174 billion of issuance in the U.S., according to JPMorgan Chase & Co.

The rehabilitation is being pursued to stimulate lending to businesses as banks shrink balance sheets to meet regulatory demands. The ECB and Bank of England will stress today the need for a better-functioning ABS market in a report, according to a person familiar with the matter, who asked not to be identified because it hasn’t been released.

“At the beginning of the crisis, policymakers started from the premise that ABS were toxic assets,” said Steven Gandy, head of securitization at Banco Santander SA in London. “The industry has worked hard since that time to show them that only a small subset of the market, like U.S. sub-prime, imploded, and it seems they are now getting the message.”

‘Shamefully Lax’

The presentation from the BOE and ECB will argue that asset-backed debt may help to stimulate credit supply in Europe, the person said. The central banks are preparing a more detailed report to be released later this year, according to the person.

While the U.K. isn’t part of the euro area, BOE Governor Mark Carney heads the Financial Stability Board, a group of global regulators and central bankers that makes recommendations on financial rules.

The change of heart is being forced by demands to boost financing for small- and medium-sized enterprises that employ about 70 percent of the European Union’s private sector workers and rely on banks for about three quarters of lending.

Charlie McCreevy, the EU’s former financial services chief, in 2009 slammed the “needless opacity and shamefully lax standards of a hyper-active securitization industry” that “caused so much damage to the global banking system.” His successor, Michel Barnier, said last month promoting securitizations that are good quality could help get financing to companies.

‘Toxic Sludge’

Reviving a market for ABS has been high on the political agenda since the European Commission identified the debt as a way of providing long-term funding for businesses in March last year. Securitization can enhance a bank's capacity to lend because securities are created by bundling existing loans into bonds that are sold to investors or pledged as collateral for central bank funding.

“For those of us who have been active in the market for a number of years and have had to live with routine descriptions of the entire asset class as toxic waste or toxic sludge, it’s refreshing to see a much more nuanced approach developing over recent months,” said Calvin Davies, the Hague-based head of securitized investments at ING Investment Management, who helps manage 8.5 billion euros of asset-backed securities.

As a sign of its commitment to the market, the ECB is challenging capital requirements for the debt proposed by the Basel Committee on Banking Supervision that issuers from Deutsche Bank AG to Barclays Plc said this week risk choking securitization.

While keen to promote ABS, officials want to avoid the lax underwriting and creation of complex products, such as collateralized debt obligations, that led to losses on U.S. securitizations that were 12 times higher than those in Europe during the financial crisis.

“They are not saying all is forgiven and all is forgotten,” said Ian Bell, the London-based head of Prime Collateralised Securities, an industry standards group. “The emphasis is on the highest quality ABS, not on bringing back things like CDOs.”

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Asset-backed securities were denounced for causing the financial crisis. Now the debt is being seen as a savior for Europe's economy.
Europe, toxic, debt, securitized
Friday, 11 April 2014 10:58 AM
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