The coming months could be make or break for the future of European securitization.
A consultation on the European Securitization Regulation (EUSR) will be launched by the EU Commission in the autumn, while former ECB president Mario Draghi is expected to submit a report on capital markets competitiveness — including securitization — in September. In addition, there may also be a report from the European Economic and Social Committee (EESC) on the sector.
These are the first steps towards potentially radical reforms to the EUSR.
Based on the crumbs of information we can gather from public statements by EU bodies and political leaders over the last year or so, the political sentiment on securitization appears to have changed. No longer the bogeyman or harbinger of financial disaster, securitization could be the key to unlocking economic growth in Europe.
But do the regulators understand this?
This week, Risk Control contributed to the debate with a paper titled 'European Competitiveness and Securitisation Regulations'. It is a paper that appears to want to drive policymaking — or at least to get policymakers' attention.
There are five authors: Georges Duponcheele, senior credit portfolio manager at Great Lakes Insurance SE (Munich RE); Marc Fayemi, principal in capital markets development at the European Bank for Reconstruction Development; Fernando Gonzalez Miranda, principal economist at the European Central Bank; Alessandro Tappi, chief investment officer at the European Investment Fund (EIF); and William Perraudin, director of Risk Control.
They form a remarkably distinguished quintet for discussing the topic at hand, and the paper makes a number of key proposals — including reducing the capital requirements on securitization so they are more proportional to the underlying risk of the assets, as well as moving the argument away from how securitizations should be compared to covered bonds.
A new lens
Yet perhaps it's most important contribution to the debate is that it encourages readers to change the lens through which they perceive securitization regulation and regulators.
In essence, the report argues that the lack of progress in changing financial regulations, which has even "frustrated" the ECB Governing Council, is down to how regulators are governed.
The report says that, over the last decade, regulatory bodies like the European Supervisory Authorities (ESAs) "have attributed the moribund nature of the securitization market in Europe to combinations of market conditions, the ECB's TLTRO [targeted longer-term refinancing options], the narrow margins on residential mortgage lending [...], rather than acknowledging the impact of their rulemaking and adopting necessary adjustments".
Indeed, despite other bodies — including the ECB itself — expressing their frustrations with the lack of progress, little has changed in the last few years. The regulators have more often than not, gotten their way.
Over the years, market sources have consistently told GlobalCapital of the dismissive — and even sometimes rude — manner in which regulators have interacted with them. The regulators' views on securitization have been so entrenched since the financial crisis that all in the sector were treated with suspicion, or at least that's how it felt.
Some explained it away by noting that regulators only get fired when there's a financial disaster. As if their chief role were to prevent financial disaster.
But the Risk Control paper asks us to reconsider that lens. It should not be a case of accepting the regulations imposed on an industry, and dealing with the economic impact. Instead, the EU should look to how securitization can be instrumental in economic development, and make this a central part of how it designs regulations.
This requires serious self-reflection by the regulators.
In many walks of life, looking at ourselves and reflecting on how we could have been better can be a painful exercise. However, it is crucially important if progress is to be made — whether that be as individuals, as teams, as companies, or even as regulatory bodies.
Today, regulators have an opportunity to reflect and change without judgment, because the political winds have changed. A fudging of the new EUSR is unlikely to be accepted or welcomed simply because the political will to get economies of the EU growing is too strong.
It's time to look inwards, and then outwardly admit a change in approach is needed.