More than a year after the European Parliament approved changes to the Capital Requirements Directive imposing tough new standards on ABS originators and investors, the Committee of European Banking Supervisors has finally published, in consultation form, its guidance on how the high level principles should be interpreted by national regulators.
And not a moment too soon — the consultation runs until October, giving regulators and banks just two months to implement the guidance before article 122a of CRD II comes into force.
Given the vague language of the directive, market participants had hoped CEBS would flesh out how banks should apply the rules. For instance, the directive says investing banks must “have a comprehensive and thorough understanding of and have implemented formal policies and procedures appropriate to their trading book and non-trading book and commensurate with the risk profile of their investments in securitised positions”.
The directive itself does not indicate further what level of due diligence is appropriate for the trading book versus the banking book, leaving market makers wondering if they would need to perform a similar level of credit analysis on their positions as a buy and hold investor.
CEBS addresses this question at some length, but its guidance raises as many questions as it answers.
“As a general principle, credit institutions should apply the same policies and procedures to securitisation positions in their trading book and non-trading book,” says the consultation paper. “However, credit institutions may distinguish between the trading book and non-trading book as long as it is appropriate and can be justified. “
What sort of justification would be acceptable is left more or less unanswered. CEBS declares that the “scope” of analysis should be the same for both books, but the “intensity” may vary. It then goes on to say that trading book requirements may be different, not just a subset of banking book requirements — a seemingly contradictory statement.
Undoubtedly there will be many questions about these issues at the public hearing on July 22.
CRD II was designed to improve the robustness of the securitisation market and restore investor confidence. But it could end up having the opposite effect, by sharply reducing already scarce liquidity.
Even if further clarification is forthcoming, investors and market makers face increased compliance burdens. Moreover, while existing investors will escape steep capital penalties should an originator fail to live up to its risk retention commitment , new investors will not, making it much harder to sell those positions.
The regulation is here to stay, however, and the industry must make do as best it can. Market-led initiatives to establish best practices and standardisation of disclosure are essential to minimise uncertainty and reduce the cost of investing.