End of a stigma

Securitisation reboot is harder than it sounds

European central bankers are suddenly promoting securitisation - the slicing of illiquid assets into tradable securities. But reviving a controversial asset class after regulators tried to kill it will be harder than it sounds. The aim is desirable when banks' balance sheets are shrinking, but it is tricky to achieve.

A paper jointly published by the Bank of England and the European Central Bank on April 11 was arguably a watershed moment. It unambiguously endorsed the financial techniques that contributed to the 2008 financial crisis. It argues that securitisation helps banks transfer risk, thus facilitating new borrowing when the economy remains weak. That is not a theoretical point: a liquid market for small companies and consumer loans would enable the ECB to embark on direct asset purchases, boosting credit in the euro zone, notably in the periphery's troubled economies.

The paper argues for a review of the regulations that threw sand in the wheels of securitisation after the financial crisis. Current rules for insurers and banks make asset-backed bonds less attractive to hold, and harder to trade. The way forward, the paper argues, is to create a new breed of high-quality securities that would benefit from softer rules.

Progress is already happening, but slowly. The European insurance and pensions regulators agreed last December to lower capital charges for certain asset-backed securities. Yet, these charges remain high compared with other assets, like covered or corporate bonds. Industry players hope the charges can be halved again. Then national regulators could be persuaded to bless even lower capital charges in insurers' internal models. Changes are also needed to banks' capital requirements and rules for liquidity buffers.

The biggest challenge may be reliably defining "high-quality." If regulators bless a product that turns out to be flawed, they will encourage the same type of behaviour that caused the 2008 crisis. Recent attempts to define high-quality illustrate the challenges. The definition proposed by insurance regulators in December ignores how diversified the asset pools are, a potential flaw. And it leaves capital charges too high for lower-ranking bonds. That would make transferring risk harder, and undermine the key benefit of securitisation.

Despite the challenges, the central banks' ambitions go in the right direction. At the very least, their statement should erode the stigma that still surrounds the asset class.