EU Seeking to Cut Minimum Risk Weighting on Simple Securitizations

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The European Commission is seeking to cut the minimum risk weight on securitizations that qualify as simple and transparent to 10 percent to help jump-start the bloc’s capital markets.

The 5 percentage-point reduction in the risk weighting for securities backed by loans or receivables is contained in a draft regulation revamping the European Union’s market for asset-backed debt obtained by Bloomberg News. The framework sets out rules for bundled debt, as well as criteria to allow short- term asset-backed commercial paper to get the simple, transparent and standardized label that allows for a lower capital charge.

The regulation is a centerpiece of the EU’s planned capital markets union, which it sees as a way to revive the securitization market after the financial crisis and to get credit flowing toward small and medium companies. The draft refers to banks and says that rules on capital charges for insurers will come later.

“This proposal aims at restarting markets on a more sustainable basis so that simple, transparent and standardized securitization can act as an effective funding channel to the economy,” according to the document. “Securitization can bridge banks and capital markets with an indirect benefit for businesses and citizens.”

The commission, which declined to comment, estimated in the draft that returning the EU’s securitization market to pre-crisis levels would provide 100 billion euros ($112 billion) to 150 billion euros in additional credit to households and businesses, a 1.6 percent increase.

Increase Funding

The proposed regulation follows the European Banking Authority’s guidance on capital charges, published in July, which it said would amount to a 25 percent reduction on average from those set in December by the Basel Committee on Banking Supervision.

The effort to make securitization more attractive is part of a Europe-wide effort to make credit more accessible to smaller companies. It is backed by both the European Central Bank and the Bank of England.

In certain situations, securitizations that have portions guaranteed by a government will be treated as “equivalent to” simpler transactions, according to the draft.