Bond Battle Seen as Draghi Confronts ABS Rules: Credit Markets

Jun 06, 2014 5:31 am ET

June 6 (Bloomberg) -- Mario Draghi is on a collision course with regulators as he seeks to revive Europe’s asset-backed debt market to boost lending to businesses.

The European Central Bank president said yesterday regulators are holding back the market he wants to use to spur economic growth. Policy makers are frustrated by the Basel Committee on Banking Supervision’s demands that investors increase the capital they hold to absorb losses on the debt.

“We are working on the ABS, but you know that there are also other actors,” Draghi said at a press conference in Frankfurt. “There has to be a revisitation of the regulation that had been introduced in the past few years about ABS to eliminate some of the undue discriminations.”

Europe’s $2 trillion ABS market contracted 32 percent since 2009 as regulators cracked down on the debt they blamed for deepening the financial crisis. The securities package individual loans such as mortgages, auto credit or credit-card debt and sell them on to investors, allowing banks to share the risk of default and encouraging them to offer more credit.

Regulators have been wary of the securities as the complicated structure of some products can obscure the true riskiness of the underlying assets. That happened with securities backed by the U.S. sub-prime mortgage market, which imploded in 2007.

ECB, BOE

Lenders from London-based Barclays Plc to Deutsche Bank AG in Frankfurt say the rules are becoming so onerous they may shun some of the debt, prompting the ECB to join with the Bank of England to seek to ensure the market isn’t unnecessarily impaired.

The central banks outlined plans last week for so-called qualifying securitizations that “would be simpler, more structurally robust and transparent,” so that non-bank investors could model risks more easily.

“Support from European central banks is very positive but the current regulatory proposals on capital charges are not conducive to growth,” Francisco Paez, who oversees $20 billion of structured finance securities at New York-based MetLife Inc., said in a telephone interview on June 3. “This dissonance needs to be addressed so that when the rules are finalized we have capital charges for ABS that are reasonable.”

The ECB is promoting bonds backed by loans to small- and medium-sized enterprises in a bid to increase funding to the businesses that employ about 70 percent of the European Union’s private-sector workers.

‘Simple and Transparent’

Draghi said the plan to revive the market includes buying “simple and transparent” notes that are backed by non- financial private sector debt. That may prove to be a challenge, according to New York-based Citigroup Inc., because there are only about 13 billion euros ($18 billion) of public bonds outstanding.

“They may well succeed in reviving the market, but only in encouraging exactly the sort of credit-intensive growth and associated bubbles in asset prices which got us into trouble in the first place,” Citigroup analysts led by Matt King said in a note to clients yesterday before Draghi spoke.

Asset-backed debt sales are heading for their busiest week in three years in Europe, with the banking unit of U.K. grocer Tesco Plc and Banco Santander SA among issuers offering almost 4 billion euros of the debt, according to Utrecht, Netherlands- based Rabobank. Sales fell to about 74 billion euros in Europe last year from 325 billion euros in 2007, an almost 80 percent decline, according to JPMorgan Chase & Co.

In the U.S., the Federal Reserve’s efforts to stimulate securitization, including making loans to finance bond purchases, fueled confidence in the market and held issuance above $140 billion at the height of the crisis in 2008 and 2009, when sales in Europe were less than $15 billion. Banks in the U.S. sold $174 billion of asset-backed bonds last year.

“Regulation continues to play a key role in shaping access to the ABS market and constraints remain which will take time to overcome,” said Neal Shah, a London-based managing director for structured finance at Moody’s Investors Service.