Banks should be forced to give investors buying securitized debt data for stress tests to gauge its risk, global regulators said as they push to make financial markets safer.
The International Organization of Securities Commissions said investors should have the same access as credit-ratings companies to “all documents and data relevant to assess creditworthiness of a given securitization product,” as part of a push to improve regulation of the industry. The group also said that the EU should work to iron out differences with the U.S. on its rule-making.
“Iosco considers that investors should be able to test whether future cash flows generated from underlying pools” of assets in a securitization will “pay investors in full and on time,” the group said in a report published on its website.
The boom in the U.S. and European markets for securitized debt in the years leading up to 2008 has been identified by regulators as one of the main reasons for the collapse of Lehman Brothers Holdings Inc. and the ensuing financial crisis, as lenders struggled with a plunge in the debt’s market value.
Securitization involves bundling together assets, such as mortgages and corporate loans, and then selling bonds that pay interest based on the performance of this pool of underlying securities.
Regulators have made strides since the crisis to force banks that create securitizations to keep some so-called skin in the game so that they will face losses if the underlying assets default, Iosco said.
U.S. rules do this directly, while EU legislation takes an “indirect approach” by banning financial companies from investing in a securitization unless the originator retains some of the risk, the group said.
The EU rules create “additional layers of complexity,” Iosco said, adding that efforts should be made to “reconcile” the measures with the U.S.’s approach.
$124 billion of securitized debt was issued in the U.S. in 2011, from a peak of $753 billion in 2006, Iosco said.
New issuance in Europe in 2011 was 228 billion euros ($290 billion), from a peak of more than 700 billion euros in 2008.