March 12, 2019 / 3:27 PM / 2 months ago

Securitisation slump knocks EU market ambition ahead of Brexit

LONDON, March 12 (Reuters) - The repackaging of loans to raise funds for companies has tumbled to its lowest rate since the financial crisis a decade ago, knocking back European Union efforts to deepen its capital market as Brexit looms.

The Association for Financial Markets in Europe (AFME) said public issuance of products that bundle loans into an interest-bearing security has fallen to 3 billion euros ($3.4 billion) so far in 2019, the slowest start to the year since 2009.

The EU is building a Capital Markets Union (CMU) to raise more funds for companies and ease reliance on banks. Its executive European Commission updates on CMU on Friday.

The shift in market infrastructure by CME and CBOE from London to the EU this week to avoid disruption from Brexit is boosting CMU efforts, however.

"It’s clear that having the biggest financial centre in the EU about to leave the single market, it’s important that we develop, strengthen our own capital market, supervisory capacity and market infrastructure," a Commission official said.

"It’s a question of being able to stand on our own two feet in terms of CMU while also being open to the world."

Securitisation was an early CMU reform of a sector that turned toxic in 2007 when asset-backed securities based on subprime U.S. home loans crashed, kickstarting a global financial crisis.

The EU created "safe, transparent and standardised" or STS products to restore confidence, but progress is slow.

"The delay in approval by the EU public authorities of key elements of the new securitisation framework is clearly a factor," said AFME, a banking trade body.

New rules forcing banks to hold cushions of assets that are easy to sell in a cash crunch are also "unhelpful", AFME said. Only "STS" products can be used but none can be eligible until the new framework is completed.

On Friday the Commission will focus on completing the 13 measures proposed, with nine agreed and two more reaching critical phases this week.

EU states and the European Parliament meet on Tuesday evening when they will try again to agree a draft law that strengthens EU-level supervision of markets.

Some countries worry about their own regulators losing power.

EU states and lawmakers also meet on Wednesday morning to agree a draft law that strengthens EU supervision of clearing houses, and the chances of a deal are seen as much higher.

It includes tougher requirements on foreign clearing houses like LCH in London after Brexit.

LCH dominates clearing of euro-denominated swaps, and the new requirements could ultimately mean that more euro clearing is done by rivals like Deutsche Boerse in the EU.

$1 = 0.8872 euros Reporting by Huw Jones, editing by Ed Osmond

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