EU weighs tarnished bonds to help fund growth

BRUSSELS (Reuters) - A form of debt that turned toxic to unleash the global financial crisis could help the European Union fund growth as banks rein in lending, the bloc's executive body said on Monday.

The European Commission said in a policy paper on long-term investment that reforms were needed to generate funds for investing in industry, infrastructure and education.

Banks have traditionally supplied 85 percent of financing in Europe but lenders now say they have to tie up capital because of new rules aimed at averting the public bailouts seen during the 2007-09 financial crisis.

EU policymakers, also faced with risk averse savers and cash-strapped governments, are exploring other ways to raise money to revive economies hit by a sovereign debt crisis.

"Reshaping securitisation markets could also help unlock additional sources of long-term finance," the policy paper said.

"Subject to appropriate oversight and data transparency, they can help financial institutions free capital, which can then be mobilised for additional lending, and manage risk," the paper added.

Securitisation, or debt based on an asset, suffered a huge setback when bonds backed by subprime U.S. home loans became untradeable in 2007, wreaking havoc at banks that bought them.

"There is scope to develop simple securitisation products based on clear and unleveraged structures, using well-selected, diversified and low-risk underlying assets," the paper said.

In a move that will be welcomed by banks, the paper said there may be a need to consider if all the new rules banks must comply with hamper their ability to fund investment.

Markets for covered bonds, a product similar to securitised debt but which remains on the issuer's books, could also be reformed to raise more funds, the paper said.


There could also be a bigger role for pension funds, life insurance companies and stock markets in funding investment.

"If banks reduce their exposure to long-term real assets as a consequence of increasing liquidity requirements, institutional investors with long-term liabilities could fill the gap as long as the regulatory framework avoids an excessive focus on short-term volatility," the paper said.

Insurers had more than 7.7 trillion euros (6.58 trillion pounds) in assets under management at the end of 2011 and provided direct and indirect funding for infrastructure projects, mortgages, government debt and corporate finance, which help spur economic growth, trade body Insurance Europe said.

The sector is worried that risk-capital rules known as Solvency II, expected to come into force in 2016 or 2017, will make it too expensive to invest in long-term assets.

"It is vital that any changes do not jeopardise insurers' ability to provide this much-needed long-term financing and stability to the economy," said Sergio Balbinot, Chief Insurance Officer at Italian insurer Generali <GASI.MI> and president of Insurance Europe.

German insurers have urged that existing restrictions be eased so they can invest more in renewable energy production. <ID: nL6N0CCEJJ>

(Reporting by Huw Jones and Jonathan Gould; Editing by Louise Heavens and Patrick Graham)