The German government is preparing changes to insolvency legislation intended to support so-called "true sale" securitisation of bank loans, Justice Minister Brigitte Zypries said on Monday.
The changes follow a decision from Germany's Federal Court, which ruled that there were doubts over whether a securitised loan, transferred under the true sale initiative, would be valid in cases of insolvency.
"We intend to create the basis to protect the so-called true sale initiative from insolvency issues," Zypries told reporters.
True sale securitisation is a technique, which allows banks to free up capital by transferring loans from their balance sheets to investors, who receive bond repayments from cash generated by the loans.
For German banks, which have been plagued by bad loans in recent years, the system offers a way of freeing up capital and cleaning their balance sheets, although establishing the market in Germany has been complicated by legal and accounting factors.
A recent ruling by the Federal Court criticised one aspect of the practice in Germany, which it said left doubts over the status of the assets behind the securitised loan in cases where the issuing bank was declared insolvent. Because the issuing bank does not transfer full ownership of a securitised loan backed by a mortgage but only administers it for the investor, the court said assets backing a loan would not be secured for the investor if the issuing bank went insolvent.
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