Regulators Seek Pro-Business Recipe for Asset-Backed Bond Market
Global regulators are seeking to coax institutional investors, from insurers to pension funds, back into the market for asset-backed bonds to boost non-bank funding for businesses.
“The focus of reviving these markets should be to build a sustainable non-bank investor base, and to avoid a system where you are just recycling the credit among banks,” Greg Medcraft, chairman of the International Organization of Securities Commissions, or Iosco, said in a phone interview.
Medcraft said regulators will set up an international working group to “look at possible impediments” to getting more “real money” into the securitizations market, with the intention that bank, insurance, and securities regulators are all involved.
The size of the global securitization market plummeted in the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc. Some 251 billion euros ($343 billion) of bonds backed by everything from auto loans to credit-card payments were issued in Europe in 2012, compared with a peak of 711 billion euros in 2008, according to data from the Association for Financial Markets in Europe. U.S. issuance totaled 1.5 trillion euros, down from a 2003 peak of 2.9 trillion euros, according to the data.
Regulators identified the pre-crisis boom in securitizations as one of the prime causes of the turmoil that followed, as banks struggled with a drop in the value of previously highly-rated instruments based on residential mortgage debt.
Still, in tandem with toughening regulations, authorities are increasing looking for ways to encourage the development of the market as a robust alternative to bank loans for companies seeking credit. The need is driven in part by banks scaling back lending to focus on balance sheet repair and meeting tougher capital and liquidity rules.
“We have a great opportunity now to reshape the securitization sector as a form of market-based financing,” said Medcraft, who is also chairman of the Australian Securities and Investments Commission “It can be a very efficient tool.”
Medcraft’s comments add to a clamor by the European Union to re-invigorate the securitization industry as a way to make it easier for companies, especially small businesses, to get access to finance.
Securitization “has become the mother of all plagues,” Olivier Guersent, chief of staff for Michel Barnier, the EU’s financial services chief, said at an event in Brussels last month. “But securitization if you think about it is nothing else than a means to transform short-term savings into long-term investment,” he said.
Iosco plans a “peer review” to compare rules put in place by different national regulators that require banks and other originators of securitized debt to retain some of the financial risk, Medcraft said.
Medcraft said standardization of asset-backed bonds is one area that should be examined by industry and regulators.
“If you think about a credit card or a mortgage, you can compare different offers -- but for securitization, this is an area where there is still a lot of work to do,” he said. “This is primarily an industry issue, but one where regulators can help.”
Iosco’s goal “has been to work to ensure consistent approaches in regulation so divergent approaches don’t create impediments,” he said. “This is why we are doing this review.”
Iosco is planning to report on the implementation of these so-called skin-in-the-game rules to Group of 20 leaders at their summit in Brisbane, Australia next year.
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