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EU plans to ease securitisation rules

Banks and insurers will not have to hold as much capital in reserve to account for certain bundled debt they hold under planned new rules on securitisation that the European Commission is set to table next month, according to a report by the Financial Times.18 Aug 2015

EU rules on securitisation were introduced following the financial crisis of 2008 but EU officials now want to ease those rules to help boost the market for securitisation, the report said. Securitisation typically involves the pooling and repackaging of loans or other assets, such as mortgages, leases or credit card receivables, and the conversion of them into debt securities. The repackaged assets are put together into portfolios and sold to special purpose companies, which fund the acquisition by issuing debt securities to investors.  The investors then receive a regular cash flow from the underlying assets.

Jonathan Hill, the EU commissioner responsible for financial services will propose lower capital charges on some bundled debt at the end of September, according to the Financial Times.

The reduction is likely to be around 25% of the capital requirements that a bank must meet for securitised debt that it holds, with similar reductions planned for insurers, the newspaper said.

Capital charges on "synthetic securitisations" and instruments built on derivatives contracts will not be reduced under this proposal, it said.

Finance expert Grace Hui of Pinsent Masons, the law firm behind said: "These proposals will provide clarity to the market and also signify the Commission’s commitment to the securitisation industry. This will in turn boost the market without necessarily increasing the risks and prove that securitisation is still a very viable means of fund raising."

The European Banking Authority recommended last month that capital charges "should be lowered so as to recognise the relative lower riskiness of qualifying products, while always keeping regulatory capital within the perimeter of a prudential surcharge".

The European Commission said in February that it would review regulations on the securitisation market in a bid to boost its growth in line with the US.

The Commission published a consultation paper in which it stressed that there is "no intention ... to undo what has been put in place in the EU to address the risks inherent in highly complex, opaque and risky securitisation". Improvements to differentiation and the development of transparent, simple and standardised securitisation are "a natural next step to build a sustainable EU market", it said.