Bankers worry HQS could threaten global status of securitization

The European Banking Authority launched a consultation on its proposed criteria for high quality securitization HQS in October, while a separate Basel Committee on Banking Supervision/International Organization of Securities Commissions (IOSCO) consultation closes on Friday.

Some types of ABS performed much better than others through the financial crisis, and the idea of branding these products ‘high quality’ has gained considerable traction this year.  Many favour using ‘qualifying securitizations’ as the term to avoid other forms of ABS being branded ‘low quality’ by default.

Backing from the European Central Bank and Bank of England has strengthened the case of industry representatives in recent months. ABS bankers hope such a definition, once finalised, will be used to ring-fence these products for more relaxed capital treatment to reflect their performance.

“Europe has its own particular problems that mean the securitization market needs to look a lot more attractive before it comes back,” said Lynn Maxwell, global head of securitization at HSBC, on a panel discussing the issue at ABS Vegas on Tuesday.

“In order to do that the concept of HQS is important. It should draw in more investors as they get more comfortable that there is a regulatory approach to HQS that is more positive.”

Maxwell added that it was vital for regulators to address the inequality between ABS and alternative forms of funding, such as covered bonds, in terms of capital treatment. At present, an ABS carrying the same rating as a covered bond would draw a higher capital charge for investing banks.

But while the concept has drawn support from the ABS community in Europe, there is concern that if the continent implements its own framework, it could make securitization issuers rely on their domestic markets even more heavily.

"We absolutely have to ensure that in coming up with a concept of HQS we get something that is broad enough to be applied consistently across different markets,” said Maxwell.

“The securitization market cannot be considered to be domestic European, domestic Aussie, domestic US, it absolutely has to be international.”

Securitization remains an international market — proof of that was offered by UK lenders Nationwide and Santander marketing multi-currency deals to US buyers and others in Las Vegas this week — but not on the scale of the pre-crisis years.

“If the Basel Committee had done a better job at getting capital treatment right to start with, maybe we wouldn’t need this,” said Debbie Toennies, head of public policy at JP Morgan’s corporate and investment bank, adding that US regulators needed to pay attention to the global impact of any European move.

“The problem with doing it in Europe is we have global securitization markets,” she said.

“Let’s say the US weren’t to do the same definition of HQS and have the same discount for risk-based capital, there will be a further differentiation. What that is likely to do is fragment the market further.”

Australian Securitisation Forum chief executive Chris Dalton said his country’s lenders were also keeping a close eye on developments in Europe.

“Pre-crisis Australian mortgage-backed and asset-backed issuers issued both to US and European investors,” he said, “but the impact of the crisis and the ongoing regulatory reforms has mean issuance has been constrained and directed toward the domestic market.

“We are concerned that where things are taken in isolation, and they revolve around a jurisdictional approach, this could impede access to markets for Australian issuers and limit the opportunity for institutions, be they European or American, to diversify their portfolios.”