New CRD IV wording ray of hope for European ABS market
In its March issue, Euromoney published an article entitled Can ABS rescue Europe’s bank-funding market?, After the magazine went to press, a new set of proposed changes to CRD IV was published on February 29.
The new wording was published specifically to address the confusion that the January drafting caused in the asset-backed security (ABS) market. Interestingly, the most recent draft removes the language in the previous compromise proposal that specifically excluded securitizations from being eligible for liquidity buffers.
It also incorporates a requirement that the European Banking Authority (EBA) considers the appropriateness of allowing other categories of European Central Bank-eligible assets to count towards liquidity buffers.
Both of these amendments are extremely good news for the ABS market. The document specifically mentions high-quality residential mortgage-backed security as an example of the type of asset that the EBA should consider for the liquidity coverage ratio (LCR).
“Although there are no assurances of the outcome of the EBA review, this is a welcome first step towards the recognition of the characteristics of high-quality ABS,” says David Covey, managing director at Nomura in London. “Hopefully, this will eventually lead to the levelling of the LCR playing field for senior prime European ABS vis-à-vis covered bonds and highly-rated corporates.
“Such treatment is a long way away, however, and is still far from assured. That said, the level playing field for European ABS seems more plausible today than it has been for some time.”