THE European Central Bank (ECB) and the Bank of England (BoE) set out proposals Friday to resurrect the European Union’s (EU) market for asset-backed securities and help the flow of credit to smaller businesses.

    Europe’s ABS market has not recovered from the stigma created by the global financial crisis, which was triggered by doubts about the quality of assets in supposedly rock-solid U.S. mortgage-backed securities.

    The ECB and the BoE aim to get European banks and investors to agree common standards for safer ABS, which could help build a stronger economy by providing credit to firms that are too small to raise investment funds direct from capital markets.

    “Securitization can support greater funding diversification, free up capital to allow banks to extend new credit to the real economy, and provide ... insurance companies and pension funds with access to a broader pool of assets,” the BoE said.

    Last month the two central banks said public intervention to kick-start the market was needed and accused global regulators of taking too tough a stance on the sector.

    The proposals in a joint report issued by the ECB and the BoE on Friday aim to reduce the risk of securitized debt by limiting its tendency to concentrate risk in institutions vital to the financial system, as well as to make their performance more predictable.

    “Involvement in this market by the authorities may be desirable to support its revitalization in a more robust form,” the paper said, adding it was now seeking industry feedback.

    In the short run, central bank input was needed to revive the market, while in the longer term it would help stop a repeat of the problems that caused the U.S. market to implode.

    The ECB is getting increasingly concerned about banks’ ability to lend and support the eurozone recovery as credit demand starts to pick up, pointing to the ABS market as a way to funnel funding to the real economy, especially to smaller companies.

    The paper suggested following the model already adopted for asset-backed securities eligible for central bank transactions, which aims to identify products that are simple, robust and transparent, enabling investors to accurately assess risks.

    It also said they may warrant more generous treatment by regulators than at present, and recommended that credit registers which provide data on whether small firms default on loans should be more open to lenders other than existing banks.

    The British Bankers’ Association (BBA) said it hoped authorities would recognize that the market was being held back by Solvency II rules for insurers.

    “I think this (report) is very helpful,” BBA executive director Simon Hills told Reuters. “As the economy recovers, alternative sources of finance for real-economy assets will have to be found, and securitization is the No. 1 choice.”(SD-Agencies)