The European Central Bank and the Bank of England released recently a joint paper on the future of securitization. The paper points out the shrinkage that occurred to the market of asset backed securities in Europe during the last few years after the outburst of the financial crisis in year 2008.

After a short but straightforward reference to the reasons, why securitization got stigmatized – mainly due to the lack of transparency that opaque structures caused and often even intended to cause – the paper centrally addresses the necessity of a liquid European securities market. The ECB and the BoE see the main merits of securitization in the following: it transforms illiquid assets into liquidity, transfers part of the underlying risk and finally, it can ease the obligation of Banks to hold capital against the relevant assets, thereby making it available for loan and other funding operations.

Earlier, on December 2012, the Basel Committee on Banking Supervision had issued a consultative paper proposing, among other things to substitute a homogeneous 20% risk-weight floor as the lowest floor for securitization exposures for the 7% supervisory risk-weight floor, which applied to the IRB approach. In a second consultative paper from December 2013, the Committee proposes to reduce the 20% and implement instead a 15% risk-weight floor for exposures with a maturity of up to one year and a minimum rating of AA+.

The joint paper of the ECB and the BoE stresses the need to go even further on reform by distinguishing between “simple and prudently structured ABS” and “more complex, opaque structures”. This fundamental differentiation is being supported, according the two central banks, by certain initiatives that already apply and seek to enhance market transparency towards ABSs such as the ABS loan-level initiative driven by the Eurosystem.

  The full text of the joint release is available under: http://www.bankofengland.co.uk/publications/Documents/news/2014/paper070.pdf See also: http://www.bis.org/publ/bcbs236.pdf http://www.bis.org/publ/bcbs269.pdf

For further information please contact:  Stavros Kitsakis – [email protected]