Monday’s announcement that the Basel Committee would lower the risk weight floor for securitizations qualifying for the “simple, transparent and comparable” (STC) label to 10% is an encouraging sign for the market — by matching the figure put forward by the European Commission in its planned “simple, transparent and standardised” (STS) securitization framework, there is finally a degree of consistency between the two approaches.
Both bodies have now produced frameworks outlining a similar capital treatment for high quality securitizations, under the broadly similar STS and STC criteria. This vindicates the European Commission's quick work in developing an STS framework, recognising its importance in helping to revitalise the European ABS market.
There are some differences between the two frameworks — the Basel committee places the burden of certifying STC compliance on investors, while the EC argues originators should be responsible — but broadly, the two bodies are heading in the same direction.
The 10% capital weighting for qualifying deals that both have put forward has also been supported in the European Parliament by MEP Pablo Zalba, the rapporteur responsible for leading the amendments to the Capital Requirements Regulation and Directive through the European Parliament.
But while aligning the capital treatment of high quality securitization globally is a good thing, any hopes that a truly level regulatory playing field will emerge would be far-fetched.
Proposals put forward by Dutch Labour party MEP Paul Tang in the European Parliament suggest that there is a weight of political sentiment against the European securitization market, which is likely to undermine any regulatory convergence.
Tang's suggested hike in risk retention for securitization originators, from 5% to 20%, is just one of the obstacles the European ABS industry must now overcome, through demonstrating to politicians that it has overcome perceived failures during the financial crisis. There have also been calls for a public data depository to keep track of investors’ holdings, and to restrict issuance to only regulated entities.
Tang has stressed his desire to “reverse the burden of proof” about whether securitization was a dangerous product — negotiations with the industry on this matter will no doubt continue, but efforts to articulate a wealth of evidence on the resilience of the market during the crisis appear to have made little headway so far.
A major issue, as Tang made clear at the recent Global ABS conference in Barcelona, is that politicians must win the support of the public for reforms to the financial sector, when trust in politicians is at an all time low. Technical considerations of market performance may carry less weight when it comes to building political consensus, rather than winning over the technocrats of the Commission.
As in the rest of the capital markets this summer, then, it is political considerations that will shape the future of the ABS market in Europe.
It is likely that as a result, the regulations that emerge from the European Parliament at the end of the year will create a market that is even more different from its global counterparts, especially the all-important US market, than it already is. Aligning risk weights is a good start, but there's a lot of work still to do.