ECB sets out plan to boost small business
The European Central Bank and the Bank of England set out proposals today to boost the market for asset-backed securities in the European Union and help the flow of credit to smaller businesses.
The ABS market slumped after the 2008 financial crisis but is now seen as necessary to help build a stronger economy by providing credit to firms that are too small to raise investment funds direct from capital markets.
Problems with U.S. mortgage-backed securities that turned out to be much more risky than their credit ratings suggested were the immediate trigger of the global financial crisis.
But the ECB and the BoE said that the European ABS market had been unfairly tarnished, and that if properly regulated, it could play an important role in supporting business investment.
"Securitization can support greater funding diversification, free up capital to allow banks to extend new credit to the real economy, and provide ... insurance companies and pension funds with access to a broader pool of assets," the BoE said.
Last month the two central banks said public intervention to kick-start the market was needed and accused global regulators of taking too tough a stance on the sector.
The proposals in Friday's report aim to reduce the risk of securitized debt by limiting its tendency to concentrate risk in institutions vital to the financial system, as well as to make their performance more predictable.
"Involvement in this market by the authorities may be desirable to support its revitalization in a more robust form," the paper said, adding it was now seeking industry feedback.
In the short run, central bank input was needed to revive the market, while in the longer term it would help stop a repeat of the problems that caused the market to implode in the United States, triggering the global financial crisis.
The paper suggested following the model already adopted for asset-backed securities eligible for central bank transactions, which aims to identify products that are simple, robust and transparent, enabling investors to accurately assess risks.
It also said they may warrant specific capital treatment and that credit registers which provide data on whether small and medium-sized businesses default on loans should be more open.
The ECB is getting increasingly concerned about banks' ability to fund the euro zone recovery as credit demand starts to pick up, pointing to the ABS market as a way to funnel funding to the real economy, especially to smaller companies.
A more active securitization market would also open the door for insurance companies or pension funds to provide funding for the real economy, which would otherwise be difficult for them.
Outstanding amounts in the market peaked at 2 trillion euros in Europe and $11 trillion in the United States in the run up to the crisis and contracted sharply as complex structured ABS and poorly underwritten loans unraveled, the paper said.
The BoE said that in Britain's case, this would allow small businesses to be less reliant on banks for lending. Current credit registers often restrict access, for example by only being open to lenders which offered business current accounts.
Bank lending to British businesses suffered its biggest fall on record in the first three months of 2014 - despite a strengthening economy, the BoE said.
In a separate paper, the BoE suggested Britain should bring back a comprehensive register of all businesses, which was scrapped in 1981, and use business tax records to bolster data in existing credit reference files.
The joint ECB/BoE paper also raised doubts about whether it was right to limit the maximum credit rating of an ABS to that of the government of the country in which it was based.
"(This) may undermine transparency around the inherent credit quality of secularizations," it said.