New EU ABS Guidelines…. Talk About Tone Deaf!!

Just as the EU Securitisation Industry is about to limp into its annual industry gathering in Barcelona next week, along comes the EU Parliament to stomp on the few green shoots that are keeping this industry relevant in the EU capital markets!

You have to ask, what are the bureaucrats thinking?

Most glaring in the proposed regulations released by the EU Parliament’s Committee on Economic and Monetary Affairs released last week are the requirements for a 20% risk retention level and the possibility that all investors may need to be regulated entities (we assume that may mean banks, insurance companies, etc.).  Not that the other major elements of the proposal are positive.  It’s just that these two really stand out as having the potential to add gas to a fire that has the potential to burn down the entire securitisation house in EU zone.

For a very long time, we have suspected that the regulators and bureaucrats that have been tasked with revising the regulations for securitisation, simply do not understand the topic or the market.  Nothing we have seen makes that case better that this insane level of risk retention (where are the economics?) and a requirement for the securities to trade only among the very same institutions that are looking to move assets off their balance sheet.  The whole idea behind securitisation is to create an orderly market which will allow non-financial institutions to invest in financial assets.  A significant by-product is the ability for the experts at underwriting and structuring these assets and securities (banks and insurance companies) to continue to leverage their capacities and expertise and to make credit available to more borrowers (both institutions and consumers), all while providing a mechanism for them to properly balance their own portfolios (a good thing for both their own shareholders and creditors).

If these new proposals become law, you might as well shut the door on securitisation in the EU.  It will be too costly to issue and there will never be enough investors.  Even in the best of times, it was always costly to raise capital via securitisation.  Nevertheless, it was competitive enough to attract enough companies to utilize it as one of several capital formation tools available to them.  In some cases, it was the only viable tool available to some issuers.

Shutting out non-regulated institutions from investing in securitisation is about as self-defeating a proposal as you could dream up.  The global capital markets need more capital, not less!  Just ask any middle market company how hard it is to get credit.  Have a look at the rapid growth of marketplace lending platforms.  Do you think the timing for this growth over the past few years has been a coincidence?  Of course it is not!  Borrowers will look where they can and these platforms have begun filling a very important need; one that probably existed before the Credit Crisis but has been illuminated with at least a little help from the failure of the EU government and regulators to get the regulations right.

There are some rumors that the egregiousness of some of the proposed elements may be a political stunt (to be traded later for other elements).  However, we can’t see the logic in that hopeful theory.  Even if it is true, this is simply too important a topic, to be playing politics.

We are certain that this topic will dominate the discussion these next few days in Spain.

Maybe, we will all wake tomorrow to hear that the EU parliament was just kidding!

About markferraris
Managing Principal Orchard Street Partners LLC

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