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Asset-backed securities (ABS), which reparcel debt based on loans such as mortgages, have struggled to regain favor in Europe after the sector unraveled in the United States in 2007 to spark financial turmoil.
However, kick-starting ABS is core to European Union plans for a Capital Markets Union (CMU) to boost the amount of market-generated funds to aid economic growth.
The hope is that by increasing banks' ability to refinance loans and sell them to investors, they will be more inclined to boost lending that injects money into the economy.
Banks have said that setting aside large amounts of capital to protect against potential default, as currently required, makes it too expensive to pool debt for sale. But the European Banking Authority (EBA) published recommendations on Friday to cut capital charges on "simple, transparent and standardized" securitized debt that also includes quality checks on the underlying loans.
"Approximately, we are reducing the capital charge by 25 percent on average," senior EBA official Lars Overby told reporters.
Though the ABS market in the United States has returned to pre-crisis levels without regulators cutting capital charges, the European proposals were welcomed by market participants
"These are good proposals and it's encouraging that they have reduced the capital requirements, broadly-speaking," said Richard Hopkin, managing director of securitization at AFME, the European banking lobby.
EU financial services chief Jonathan Hill wants the basics of capital markets union in place by the end of 2019 and will propose a draft law in the coming months to cut capital charges on ABS, drawing on Friday's advice from regulators.