European ABS: you know when you’ve been Tang-oed
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European ABS: you know when you’ve been Tang-oed

Regulation

MEP Paul Tang’s proposal to hike European ABS risk retention to 20% is grounded in a worn-out characterisation of structured finance, and shows that the industry is still struggling to shake off the perception of the US subprime crisis.

Last week MEP Paul Tang, the rapporteur for the “simple, transparent and standardised” securitization framework in the European Parliament, proposed that ABS issuers should retain a 20% chunk of all deals, as opposed to the current 5%.

This would help the market avoid moral hazard and “assure a better alignment of interests”, he said.

No one doubts the importance of aligning the interests of securitization originators and investors. But market players are incredulous at the proposal to ratchet up risk retention fourfold, especially when they are yet to see evidence of how exactly Tang got to the 20% figure.

Where is the evidence to suggest that a 20% risk retention piece will align issuer and investor incentives more effectively than the existing 5% figure, a level that has also been deemed appropriate by US regulators?

This is a political slap in the face for a market that cannot shake off the negative connotations of the financial crisis, despite the best efforts of the industry. 

Sadly, the European market continues to be tarred with the same brush as US subprime, regardless of the wildly different performances of both markets through the crisis. 

As commissioner Jonathan Hill pointed out when speaking to the European Parliament on Monday, the default rate in triple-A rated US deals hit 16% at the height of the market turmoil, with devastating consequences. In Europe, the figure was just 0.1%. 

This is a point that the market has been making repeatedly since a harsher regulatory environment was rolled out after the crisis. How many more times does Europe’s securitization industry need to prove that is not the wild west of US subprime? Despite industry efforts and a mountain of evidence, the message has clearly failed to take root.

It would be reckless to ignore the lessons of the US subprime crisis. Many European investors lost staggering amounts of money in that market. But to penalise European ABS originators, at a time when central bankers and regulators are stressing the importance of reducing Europe’s reliance on bank funding, is not a fair reflection of the actual performance of the market. 

Tang’s approach suggests that European ABS is guilty until proven innocent. The market can only hope that his views are not shared by a majority of European policymakers.

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