The regulatory environment for securitizations in Europe just keeps getting better, or at least the tone of policy announcements is improving. The latest document doing the rounds in Brussels is a response to the Capital Markets Union initiative.
It contemplates lowering the capital requirements for credit institutions holding securitizations even further, especially down the capital stack, formally capping the capital cost of securitizing assets, and promising to review synthetic deals and asset-backed commercial paper.
This might be good for the European securitization market. Anything that lowers the cost of issuance should be. But the paper falls into the traps of excuse making and special pleading.
First up, it contemplates a special carve-out for SME securitizations guaranteed by public sector institutions.
This has precedent — SME lending gets special treatment in the Capital Requirements Directive and in the Bank of England’s liquidity facilities. But special pleading is not a good way to write financial regulation.
In an ideal world, politicians, then regulators, would spend time analysing and diagnosing a problem, identifying a possible solution, then implementing a proportionate fix taking care to minimise unintended consequences.
Instead, the policymaking of the post-crisis years has been about shooting first, and asking questions later.
Whole areas were brought into the regulatory perimeter after the crisis, with little or no study of the costs and benefits — fixed income trading venues, alternative investment funds, for example. Vast volumes of new rules were rushed out, and fleshed out into reality by the harassed European regulatory bodies, themselves new post-crisis creations.
Some of the changes are wise and sensible — nobody seriously disputes that forcing banks to run with more tangible equity and more liquid balance sheets is a good idea — but some of the changes have the quality of random lurches, unconnected to evidence and inspired by prejudice.
The immediate re-regulation of securitization had something of this quality, but it wasn’t confined to securitization only. The bonus cap, for example, was slipped into prudential bank regulation on the questionable grounds that incentive pay over 200% of basic was intrinsically dangerous to the solvency of credit institutions.
Now at least the tide is turning, but there’s still a lamentable lack of honesty. It would be totally reasonable for the Juncker Commission or last year’s newly minted European Parliamentarians to admit that the crisis response (by their predecessors) was reactive, ill-considered, and over-reaching in some areas.
Instead, European policymakers maintain an elaborate parallel universe where nuance is piled on nuance to justify reversing course. Securitization capital requirements were not wrong; the rules simply failed to offer an appropriately risk-sensitive treatment of simple, transparent and standardised securitizations.
The Commission is also hinting at a broader review of the Capital Requirements Directive to “gain a better understanding of the impact of the new rules on the availability of financing, especially for infrastructure and other investments that support long term growth”.
It’s good, again, that the Commission now wants to look at the evidence (if a little late in the day), but why not be blunt about it, and admit that extending the baroque regulatory edifice of CRD IV to every bank in Europe was massive overkill? Why hide behind the language of supporting growth, SME lending and infrastructure?
Asking politicians for more honesty and clarity in their communications may seem optimistic, but the need to hide behind these excuses has real consequences. Poorly designed regulation riddled with carve-outs creates cliff effects, encourages regulatory arbitrage, obscures real risk, and misallocates capital.
It’s commendable that politicians are thinking again about the last generation of regulation, but it would be nice if they didn’t need excuses to do so.