Regulators must get along on ABS
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Regulators must get along on ABS

High quality securitizations that benefit from favourable capital treatment could be the catalyst that the ABS market needs, by increasing investor confidence in the market and making the asset class more attractive to issuers. But regulators need to sort out their differences first.

The European Commission has led the issue, proposing amendments to the capital requirements regulation that created a definition for ‘simple, transparent and standardised’ securitizations and was broadly welcomed by the market.

Tuesday’s proposals from the Basel Committee broadly reflect the same intention — to create a new class of high quality securitization that increases investor confidence in the stigmatised asset class.

But there are differences in the two proposals that could yet delay the implementation of this positive step forward.

Because of differences in the formula used to calculate the risk weighting, bank investors would have to hold different levels of capital against the same securitization deal, depending on whether they used the Basel or European Commission approach.

This kind of confusion is exactly what the securitization market doesn’t need.

ABS market participants have been telling GlobalCapital for a while that it is regulatory uncertainty, as much as regulation itself, which is keeping investors from embracing ABS.

And with the Basel proposals the ABS market, crying out for regulatory clarity, has been handed a further source of uncertainty.

What the market is hoping for is a unified approach to regulation that investors and issuers alike can have confidence in.

If regulators are serious about revitalising securitization markets as a way of stimulating lending in the real economy, they would do well to ensure the simple, transparent and standardised securitization project is not derailed by divergent approaches.

The onus will be on the European Commission and the Basel Committee to ensure the alignment of their two proposals does not drag on any longer than it has to.

It may not be simple — but it is vital.

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