European ABS practitioners could be forgiven if they rolled their eyes when they opened MEP Paul Tang’s working document on the “simple, transparent and standardized” securitization framework.
Tang launched into his discussion of the framework with an eye-catching quote from Michael Lewis — the author of The Big Short, the book and film which laid bare the failings of the securitization market during the US subprime crash.
A book and film which also paid scant attention to the relative resilience of the European market during the same period.
Plenty of European investors lost astonishing sums of money buying US RMBS. So it’s unwise to completely ignore practices across the pond.
But, as the industry has continually stressed, the European market did not have the same originate-to-distribute models and poor, or fradulent underwriting that characterised US subprime.
To draw too many conclusions from what happened in the US would be to repeat the mistake that European regulators made after the crisis, in tarring all securitization with the same brush.
Constructive tone
But, if Europe’s ABS professionals had seen the quote from The Big Short and closed the file, despairing at another politician who has jumped on the demonization of securitization as “toxic sludge”, they would have missed the otherwise constructive tone of what Tang said.
Securitization has the potential to contribute to a more stable financial sector, he said. He pointed out that European ABS ratings were not as volatile as they were in the US. And while he clearly has a focus on improving the transparency of information and reducing the risk of “moral hazard” in the market, Tang wasn’t far away from the heart of the issue when he explained that a careful calibration of capital charges, avoiding excess leverage in the banking system without stamping out investor enthusiasm, was the key to reviving the market.
There are also positive signals about the potential for synthetic securitization to be included in the STS framework, incorporating research from the European Banking Authority.
This is a decent step forward considering that last month the market heard that Tang “hates” synthetic securitization.
Work to do
But let’s not get too carried away. There are also signals in the document that the industry still has plenty of work to do if it is to secure a better regulatory framework.
Tang insinuates that the stigmatization of the asset class was one of the reasons, among others, why investors withdrew from the market after the crisis.
But investor demand for ABS — at the right price, and with the right regulatory treatment — is certainly there. The stigma most people have identified is mainly found in the political sphere, which came down hard on the industry in the aftermath of the crash and has landed the market with a punitive regulatory regime.
So, perhaps a little more self-awareness from the politicians assessing the merits of the securitization market would be helpful.
But there is enough progress in the latest stab at the STS rules to reassure the industry that its efforts to secure better regulatory treatment have been noticed.