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April 11, 2014

Europe’s top central banks push for high-risk loan return

“Europe’s two top central banks will on Friday make a joint push to revive an asset class that was vilified for its role in the financial crash in an attempt to kick-start lending to the region’s credit-starved companies.”

“In a draft paper seen by the Financial Times, the Bank of England and the European Central Bank call for the easing of “unduly punitive” rules that make it less attractive to buy packages of loans known as asset backed securities.”

“The paper, which is due to be published on Friday, is part of a campaign led by the ECB to distinguish high quality European debt that has been packaged up or securitised from US loans.”

“Despite much lower default rates than in the US, the European market for securitisation has all but closed for business since the crisis, when the practice of slicing and dicing of loans was blamed for spreading problems in the market for US subprime housing loans to the global financial system.”

“Despite its long-term social value, securitisation today suffers from stigma, reflecting both its adverse reputation among investors and conservatism among regulators and standard-setters,” the central banks say in the draft paper.

“They add: “Revitalising publicly-distributed ABS issuance on any meaningful scale would require concerted policy action in various fields and involving a range of official entities.”

“Banks use asset-backed securities, which can be created from bundles of loans for anything from mortgages to credit cards and cars, as a funding tool. Selling the securities would free up more money for loans to businesses and households.”


Read full length Financial Times article here.

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