EU May Allow Banks to Count ABS Towards Liquidity Rules

Potentially important news out of Denmark this past week as a draft of a new law which  would allow European Banks to utilize ABS holdings to meet new liquidity rules will be considered by the European Union in the coming weeks.

The draft which was apparently first released on January 9th by Denmark, which currently holds the EU Presidency, would require the European Banking Authority to allow member banks to count “asset-backed securities of  high credit quality and liquidity” against the “liquidity coverage ratio” as prescribed by Basel III.  Asset-backed securities are currently not eligible under the Basel III rules.

No matter how you slice it, this has the potential to be a very significant development; one that could have a significant impact on the return of  European banks as investors in Euro-originated ABS as well as US and Asian originated ABS. 

While the end result may only open the door to very safe and perhaps very “plain vanilla” structures, nevertheless,  in a yield hungry investor community, the opening of the door to ABS for European bank balance sheets has many, many positive implications.  

In order for the proposal to become law it will have to be approved by each of the governments in the 27 nation European Union and the European Parliament.  The sooner, the better.

About markferraris
Managing Principal Orchard Street Partners LLC

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