Banks look to ECB, BoE for speedy action on securitised debt

Europe's two top central banks needed to revive the securitised debt market to fund economic growth into speedy action, a top banking lobby said on Monday, Reuters reported.

The market for debt backed by pooled home and other loans acquired a dubious reputation when bonds securitising low quality US mortgages became untradable, setting off the 2007-09 financial crisis, with the taxpayers having to bail out banks.

According to the ECB and the BoE, revival of the top quality end of the market would help plug a funding gap created by banks lending less, especially to small and medium-sized companies.

According to the ECB, it was stepping up preparations for acquisition of asset-backed securities, pending "desirable" regulatory changes to spur issuance, as part of measures to pump money into the sluggish euro zone economy.

The two central banks had outlined hurdles to a revival and the Association for Financial Markets in Europe (AFME), representing leading banks said on Monday it was now time to act.

Around €181 billion of securitised debt was issued in Europe last year, down 28 per cent on 2012, only half of which was actually placed with investors, AFME said in a report. Placed issuance was down to €13.6 billion in the first quarter of this year.

Meanwhile, in a separate report, Reuters said ECB policymaker Christian Noyer highlighted low and falling inflation as Europe's main short-term problem, saying it heightened the risk of actual deflation and could threaten economic recovery.

"The main challenge, of course, is low and declining inflation, with inflation expectations in the euro area drifting downward at short to medium-term horizons," Noyer, the French central bank chief and member of the ECB board, told the economic Conference de Montreal.

"This prevents adjustments in relative prices, an important mechanism to eliminate gaps in competitiveness, and it increases the risk of outright deflation, should a negative shock occur in the future."

He said it was puzzling that in the euro area inflation and growth were moving in opposite directions. "As growth accelerates, inflation keeps going down."

To try to understand the reason, he looked at strong capital inflows into euro area economies in recent months, which had two opposite effects on financial conditions, lower long-term interest rates but an appreciation of the euro exchange rate.

"It's not clear whether the overall effect is positive. While nominal conditions are more accommodating in (the) euro area than in the US, real indicators point to a more restrictive stance," he said.