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June 2010 | ifr Top 250 Borrowers | 31 ABS REGULATION Regulatory overkill


The financial crisis revealed many faults to the securitisation market and there is no question that these needed to be fixed. But it seems likely that the sheer number of initiatives, some of which conflict, will stifle and possibly snuff out the anaemic recovery. William Thornhill reports.


“The plethora of different initiatives, some of which are conflicting, may risk some regulatory confusion.”


have been instrumental in establishing the new world order. However, though ostensibly laudable, their efforts to devise the safeguards that will ensure a sustainable long-term revival of the securi- tisation market are in reality politically driven by regional agendas. The resulting uncertainty risked undermining recovery – and even snuffing out securitisation as a funding technique altogether. “The plethora of different initiatives, some of which are conflicting, may risk some regulatory confusion,” said Krishnan Ramadurai, managing director of the credit policy group at Fitch Ratings. The flaws in the structured finance market ran deep and were manifold: the perverse incentives of originators that were solely concerned with expanding their market share at any cost; the conflicted business models of rating agencies, who kowtowed to their sell-side paymasters; and the willingness of investors to buy toxic securities they could never realistically hope to understand or value.


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Faced with these woeful inadequacies, governments and their regulators moved to insure that such mistakes would never be repeated. Though governments have been mindful to stress that a functioning structured finance market is essential to the effective revival of the global economy, the reality on the ground tells a different story.


“There are a large number of new regulations devised with a view to delivering a more stable structured finance sector longer term,” said Stuart Jennings, managing director in the European structured finance group at Fitch. “However, many of these are due to become effective when the market is still


raditionally, regulators have lacked the teeth to enforce. But in the last two years, they have increasingly found themselves taking centre-stage. Regulators


struggling and these will not help recovery in the short term.”


In a report on the role of the ECB in structured finance, Fitch cites various initiatives that may create uncertainty, including proposals to increase capital re- quirements which will make securitisa- tions less attractive for CRD-reliant bank investors. The increase in regulatory capital requirements ignores the fact that rating agencies have tightened criteria and now demand greater subordination for a given rating. Tighter criteria and higher capital charges were two decisions taken independently but with little thought the combined impact. Banks wishing to invest in structured finance are also now subject to minimum due diligence requirements under CRD2 (122a). It is difficult to argue that more transparency is anything but a good thing, but there is a risk that the rules will encourage opacity, not transparency. Even in pre-crisis times offering circulars would run to several hundreds of pages, making it relatively easy hide material information within reams of data. Producing a greater volume of information “may result in investors failing to meet their statutory due diligence requirements” if they are found not to have examined this information effectively, Jennings said. Moves to standardise data fields could genuinely help improve transparency, mitigating concerns over the sheer volume of information. But there is no agreement about what those standards should be. In a recent structured finance


conference in Europe, loan-data disclosure was deemed a good thing. But investors said standardisation of the key definitions was more important. It is more useful to know what an originator calls a self- certified loan than whether a pool contains 5,000 or 6,000 of these loans, they said. Other very common definitions have yet to be determined. Structured finance pro- fessionals met in early May to try to agree a


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