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Papademos Says ECB to Help Revive Securitization (Update1)
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By Simon Kennedy and Esteban Duarte

Dec. 12 (Bloomberg) -- The European Central Bank plans to take steps to help revive the asset-backed bond market, Vice President Lucas Papademos said.

“The ECB will be taking some initiatives to help catalyze the re-launching of securitization on a sound basis in the context of its collateral framework policy related to the implementation of monetary policy,” Papademos said at a conference in Berlin today, without giving details.

Europe’s market for bonds backed by real estate, consumer debt and corporate loans totals more than $3 trillion. It was dormant for more than a year until September, when Volkswagen AG and Lloyds Banking Group Plc sold investors 1.7 billion euros ($2.5 billion) of the securities.

“Steps can be taken to re-launch securitization, but to re-launch it on a sound basis so as to facilitate the provision of credit to the economy and the better distribution of risk among market participants,” Papademos said.

The ECB can influence the asset-backed bond market because it accepts the securities as collateral for loans to banks. It said on Nov. 20 that from March, newly issued asset-backed securities it is presented as collateral must be graded AAA/Aaa from two ratings companies instead of just one.

Papademos said “to restore confidence” in the market it was important to improve the transparency and standards of securities.

Toxic Asset Rules

The central bank has looked into rules to force banks to give investors details of each loan packaged into the bonds, to limit the inclusion of toxic assets that contributed to the worst credit crisis for decades.

Papademos also said greater regulation of banks can help rather than hamper economies.

“Better regulation and improved macroprudential oversight will not hinder” financial innovation and efficiency, he said. “They will support economies’ long-run growth performance.”

Tougher oversight of banks is positive for markets because it limits the likelihood of financial turmoil even if banks are forced to hold more capital, Papademos said, citing recent research. The “crisis provides very convincing evidence that regulatory reform and macroprudential oversight will support sustainable growth,” he said.

Regulation Overhaul

The European Commission in September proposed a systemic- risk board as part of an overhaul of regulation following the worst financial crisis since the Great Depression.

Part of that proposal includes creating regulatory bodies for the banking, securities and insurance industries. EU finance ministers this month approved forming the three regulators, overcoming objections from the U.K.

Papademos, whose eight-year term ends May 31, said regulators must make sure they have the relevant data and tools to spot and counter system-wide risks.

To contact the reporters on this story: Simon Kennedy in Berlin at [e-mail] Duarte in Madrid at [e-mail];
Last Updated: December 12, 2009 08:28 EST