Market supervisors must ensure that banks value their assets more prudently in the post-crisis securitization market, Thomas Huertas, alternate chair of the European Banking Authority and executive committee member at the Financial Services Authority, said in a keynote speech on Tuesday afternoon.
Huertas said market authorities have subjected rating agencies to increased regulation and supervision since the financial crisis, while regulators have also addressed shortcomings among banks. He said that prior to the crisis, banks had incentives to put securitizations into trading books, even if they didnt trade that often. The Basel Committee has corrected this, Huertas said. Further initiatives would further ensure future stability of the market.
Huertas said from an originators perspective, securitization adds to funding flexibility, while for investors it offers an investment that is bankruptcy-remote from the originator. But a large pre-crisis contingent of investors came from the conduits and structured investment vehicles, which had been sponsored and managed by major investment banks. This proved unsustainable. This was shadow banking, and the crisis was due to interaction between securitization and shadow banking, he said.
The crisis brutally exposed the problem of independent price verificationor the mark-to-myth model, Huertas added.
But some delegates took issue with his remarks. Richard Hopkin, a managing director at the Association for Financial Markets in Europe, stressed that European ABS has continued to perform well throughout the crisis. The fact that mortgage origination in the U.S had not been properly regulated was not relevant on this side of the Atlantic, according to Hopkin. Isnt it unfair to tar European securitization with the same brush? he asked.
Huertas replied that the market is a global market, with many European banks raising funds in the U.S. But he conceded that some of the excesses of the U.S. market were not present in Europe.