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Securitization

Time for EU ABS and regulators to grow up

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Governors and governed need to treat each other better

The European supervisory authorities’ review of the securitization prudential framework turned out to be just another chapter in the long tale of an unhappy marriage between EU regulators and the ABS industry. It’s time for both sides to grow up.

While the ESAs argue no major insurance companies or banks are using the product for their liquidity coverage ratio or Solvency II requirements, the market says that’s because securitization is treated so harshly in the rules.

The ESAs are not convinced that the product has been sufficiently stressed to know whether it really has moved on from the global financial crisis. The market calls it a “weak” argument, that reveals the regulators' “confirmation bias”.

It’s not easy to discern who is right, if there is even a right. But one thing is clear, and has been for a while: the relationship and communication between the two is broken.

A lot of the analysis driving the ESAs’ reports suggests that they rely heavily on data and do not seem to discuss issues or discrepancies in the data with the market. When they do, it seems they may not trust what the market says.

One lawyer told GlobalCapital it was as though every time someone raised an issue, the ESAs saw it as an attempt to pull the wool over their eyes.

Another market participant said that if the ESAs had asked bank treasuries why they don’t use securitization in their LCR allocations, they would have known that it was because the rate of return was not good enough, not that the product was inherently risky.

The distrust on both sides is obvious.

Perhaps if all involved in securitization could begin to treat each other with respect, acknowledge their common goals and place their trust in one another, we may begin to see better days for the market.

Offering funding diversification as recessions hit Europe and leading the charge in financing the EU’s green transition plans, securitization has much to offer.

Let's call it a new year’s resolution.