The Bank of England last week joined the ABS transparency bandwagon, unveiling an overhaul of its discount window facility, first proposed in October 2008 to augment the bank’s lender of last resort function with a more permanent, less stigmatised way of providing short term liquidity to “sound” banks.
The consultation consists of two parts — the ABS transparency measures and eligibility criteria for whole loan portfolios, marking the first time loans rather than securities have been accepted by the Bank.
The latter measure, however, has been greeted with some scepticism. Between the hefty haircuts and the extensive preparatory work that must be performed by originators, it would appear to be of little use to all but the smallest firms, especially building societies, who would be unwilling to put together a securitisation or covered bond programme.
The ABS criteria, however, have the potential to reshape the market, because of the central role ABS has played in central banks’ liquidity support and as a form of best practice kitemark. It is noteworthy, therefore, that while the Bank of England has trailed the European Central Bank and the Federal Deposit Insurance Corp in laying down rules for disclosure, it has taken a far broader view of transparency than other central banks and supervisors.
Like the ECB and FDIC, the Bank proposals would require loan level disclosure of collateral performance, but it does not stop there. It is also consulting on requiring the public disclosure of underlying deal documentation, usually only available on request by existing investors, and then often only by visiting the trustee or paying agent’s office.
Similarly, the Bank wants to make originator/arranger verified cashflow models available to the public — a truly groundbreaking proposal, though one greeted with scepticism by many in the market.
On the other hand, the asset level disclosure requirements have been fairly well received, even by issuers, who have slowly been coming round to the reality of the new regulatory environment.
There are clearly kinks to work out. Many of the Bank’s proposals are expressed highly tentatively, though the underlying message that it will be demanding greatly increased transparency. But the Bank should be congratulated for moving the debate on transparency beyond collateral disclosure and standardisation — all too often held up as a panacea by policymakers. In many cases investors have been tripped up not by a lack of information about asset performance, but by conflicts or errors in deal documentation that only came to light when the assets turned sour.
Only a Leibnizian optimist would think that every investor, or even most, would take advantage of the Bank’s proposals and pore over every contract underlying every securitisation they invest in. Then again, it only takes one diligent investor or potential investor to spot a problem and sound the alarm, providing the information is available.