* Standard-setters digest feedback on state of securitisation
* Capital charges remain major complaint
By Anna Brunetti
LONDON, Aug 1 (IFR) - Responses from the securitisation industry to the market survey launched by the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions (IOSCO) at the beginning of July are starting to become public after the deadline passed on July 25.
The two international standard-setters, which seek to identify the main hurdles in the ABS market and possible solutions to them, seem to be taking note of the recent shifts in regulatory sentiment to revive securitisation.
The Basel Committee is in charge of deciding capital requirements for the banking sector - one of most dreaded sets of rules of the post-crisis era. Proposals on how much capital banks should set aside to cover potential downturns on their securitisation exposures have been among the most unwelcome news for the sector.
Basel published proposals in 2012 for minimum risk weightings of 20%, and softened them slightly in 2013 to 15%. However, this is still significantly higher than the current 7% floor. And higher risk weightings mean thicker capital buffers.
By launching the survey, Basel is raising hopes that global policymakers are at last willing to adjust their stance. But compared with other legislative initiatives such as the Liquidity Coverage Ratio (LCR) by EU bank regulators and the Solvency II capital rules for insurers by the European Insurance and Occupational Pensions Authority (EIOPA), changes to the Basel capital rules for securitisations are advancing on a less stringent timetable and may be further from a conclusion, argued Andrew South, head of European structured finance research at S&P Ratings Services.
“So, it’s probably a positive sign that the Basel Committee posted this survey [at this time] as it may inform their final decisions” on the levels of capital charges, South said.
The Association for Financial Markets in Europe (AFME) argued in its response that, based on the evidence of securitisation’s historical performance, regulators’ reactions to the financial crisis have been too harsh. This turned into a “serious and systemic loss of faith” and a “severe shrinkage of the investor base”, the group said.
Capital requirements envisaged by both the Basel Committee and EIOPA are an obvious threat to securitisation as they make it much more expensive for banks, insurers and pension funds to hold ABS.
“Policy incentives should encourage existing investors to stay, and new investors to participate, yet the existing regime would seem to have the potential opposite effect,” the group said.
EIOPA’s proposed capital charges, even if reduced from 7% per year of duration to 2.1%, would mean that a five-year Triple A prime European RMBS would still require 10.50 of capital for every 100 invested. This compares with 0.12 of defaults over the last seven years across the entire capital structure, not just at Triple A, AFME argued, while an insurer could incur no charge buying loans in unsecuritised format.
Corporates, meanwhile, would only have to put aside 0.9% per year of duration, and covered bonds just 0.7%.
The association said 86% of insurers and asset managers it surveyed would exit investments entirely or keep only a significantly reduced slice if charges on non-senior tranches were applied as proposed.
Aligning capital charges more closely to the treatment of other asset classes, to reflect the actual performance of ABS, would be one of the actions regulators should take to improve market prospects, both AFME and S&P analysts believe. CENTRAL BANK INTERFERENCE On top of the heavy regulatory responses, accommodative monetary policy of the last few years has reduced securitisation’s attractiveness as a funding tool compared with other products, such as covered and corporate bonds and central bank schemes, AFME said.
Past and present central bank initiatives, such as the ECB’s LTRO, mean banks can obtain funding for a guaranteed and extended period for as little a charge as 25bp, AFME said. This competitive advantage risked “crowding out” private investors if programmes were not calibrated “to complement, rather than compete with” private sector demand, the association said.
In the case of an ABS purchase programme, AFME said it was essential for the ECB to guard against dangerous side-effects. First, to qualify for ECB purchase a minimum portion of the securities should be publicly placed. Second, the ECB should also buy into mezzanine tranches to ensure enough higher-rated tranches remained available in the market for investor purchase, and should ensure that the availability of ABS collateral was not wiped out by the purchase scheme.
If structured in this way, with the central banks acting as “last resort” buyers, AFME argued that the programme could sustain banks’ market-making activities in ABS trades, which had been heavily impacted after 2008, sending positive signals to the investor base.
South agreed that “the effects [of the programme] will depend on the details of the implementation”, on whether the ECB would buy only into bonds that were also sold to investors and into different parts of the capital structure.
AFME said that another key step regulators should take was to include a wider range of assets in the high quality liquid assets bucket, so that they would count as liquidity buffers in the LCR.
South said that the recent postponement of the European Commission’s deadline to post final LCR rules from June to September, and reports of a potential delay of the actual LCR implementation from January 2015 to October, confirmed that policymakers seemed to be allowing “more time for other initiatives such as the European Central Bank and the Bank of England’s [discussion paper] to inform the regulatory discussion”.
Other elements highlighted by AFME as creating inconsistencies in the securitisation market include risk retention rules - which place the burden of compliance on investors and discriminate against some less traditional securitisation sectors - and the costs and rating restrictions of ancillary liquidity providers - essential in guaranteeing a securitisation’s effectiveness as a counter-cyclical tool for bank issuers. (Reporting By Anna Brunetti, editing by Anil Mayre)