EU Asset-Backed Issuance May Fall on Risk-Retention Proposalby
Plan by lawmaker Paul Tang quadruples risk retention level
Rabobank’s van Leeuwen says rule may make ABS less attractive
Issuance of asset-backed securities may be hit by a European Parliament proposal to boost the portion of the transaction that the firm originating or sponsoring it must retain, even as policy makers try to revive the market.
The Brussels-based assembly is considering a bill that would create a new class of “simple, transparent and standardized” securitized products that qualify for preferential capital treatment. The draft law sets a risk-retention requirement of no less than 5 percent . A proposed amendment by Paul Tang, the parliament’s lead lawmaker on the bill, raises that to as much as 20 percent.
“The higher you set this requirement, the more unattractive securitization becomes, and from that perspective you’d expect less issuance,” said Ruben van Leeuwen, a senior ABS analyst at Rabobank Groep in Utrecht.
Jonathan Hill, the EU’s financial-services chief, presented the asset-backed debt plan in September in a bid to deliver as much as 150 billion euros ($171 billion) of new lending and diversify funding sources for companies traditionally reliant on banks. By bundling assets and selling them on as securities, banks can free up balance-sheet capacity to offer new loans to companies, according to the plan.
The risk-retention requirement is intended to make sure issuers “maintain skin in the game, so that their incentives are aligned with those of their investors,” Hill has said.
While Tang proposed setting the risk-retention level at 20 percent, he indicated he would accept a smaller percentage if that is what is specified by the European Banking Authority in technical standards. The EBA “should have the possibility of proposing a lower risk-retention rate for the securitization market as a whole or for certain segments of that market by way of draft regulatory technical standards,” he proposed.
“When trying to revive the market of securitizations, we need to draw and apply the lessons from the crisis, and to make sure that the securitizations do not contribute to financial instability or lead to moral hazard,” Tang said by e-mail on Wednesday. “A higher skin-in-the-game brings both ends closer.”
Tang’s proposal reverses the burden of proof by setting a high initial level and giving supervisors the possibility to set a lower risk-retention requirement after explaining how this would “preserve the goals of financial stability and risk alignment,” he said.
In its proposal, the European Commission maintained the 5 percent minimum because in a public consultation it found “broad consensus among market participants, regulatory authorities, central banks and finance ministries that the existing risk retention requirements are functioning appropriately,” according to spokeswoman Vanessa Mock.
In addition, “risk-retention rate changes depending on the type of securitization can lead to uncertainty for market participants and can lead to unequal competition between secularizations and other asset classes,” Mock said.
The higher requirement would mostly impede so-called arbitrage transactions, as when a bank acquires a portfolio of loans at a certain price and funds the purchase via a securitization at a lower price, van Leeuwen said.
“The more the issuer has to retain, the less attractive the arbitrage becomes,” he said said. “We currently see this mostly in collateralized loan obligations.” Smaller lenders with few funding options other than securitization might also be worse off under Tang’s proposal, he said.