Brexit Set to Create Two Securitization Laws Where One Sufficed

  • U.K. Withdrawal Bill may emulate EU law to revive ABS market
  • Law is outcome of years of negotiations backed by Britain

While a single law to revive asset-backed lending may be a good thing, having two identical measures is surely overdoing it.

The European Parliament voted on Thursday to adopt legislation designed to breathe life into the market for debt securities backed by mortgages, car loans and the like. In doing so, lawmakers declined to extend its benefits to countries outside the European Union.

The measure is a regulation rather than a directive, and as such will apply directly to member states, including the U.K., the jurisdiction that hosts the region’s financial hub. That means it will be taken into British law as the nation leaves the EU, and depending on the terms of the U.K. government’s EU Withdrawal Bill that will create two separate but identical regimes running in parallel.

Buyers of the new category of “simple, transparent and standardized” asset-backed securities will qualify for preferential capital treatment thanks mainly to the way the debt is structured. The issue is that the law requires the originator, the sponsor and the entity that issues the bonds sold to fund the deal to be in a member state, a status the U.K. will lose in 2019.

“We will have two totally identical STS regimes, one in the U.K., one in Europe, that will work in exactly the same way,” said Ian Bell, who heads the secretariat of Prime Collateralised Securities Ltd., an industry lobby group. “But a U.K. STS cannot be treated as such by a European investor, and a European STS won’t be treated as STS by a U.K. investor.”

British Backing

Securitization involves bundling assets and selling them on to a special-purpose entity that then sells bonds of various levels of risk. It allows banks to free up balance-sheet capacity to offer new loans to companies which, according to the bloc’s plan -- enthusiastically backed by the U.K. when conceived -- could deliver as much as 150 billion euros ($175 billion) to the real economy.

The duplication of laws could probably be resolved by the U.K. agreeing to amend its law, said Bell. However, that might mean passing additional legislation, which may not be a post-Brexit priority compared with areas such as the state-run National Health Service.

“STS regulation probably ranks around No. 926 in the order of priorities politicians are going to deal with,” he said. “We’re going to get the NHS, agriculture, fisheries, we’re going to get food safety. It is very difficult to imagine this is going to be anywhere near the top of anyone’s priority list.”

The measure has had a difficult birth, provoking heated debate among lawmakers, many of whom blame securitization for spreading the damage caused by the financial crisis that started a decade ago. The European market for asset-backed securities withered after banks were hit by losses on U.S. subprime mortgage debt and had to be bailed out by taxpayers, even though losses on most EU securitizations were no greater than usual.

“This is the latest example of political amnesia and regulatory rollback,” Sven Giegold, financial and economic policy spokesman for the Greens group in the EU parliament, said in a statement. “The legislation will benefit complex banks and other finance firms, but neither the real economy nor ordinary citizens.”

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