The overall effect of the proposed one-size-fits-all risk retention rule for securitization remains uncertain.
However, one thing seems to be clear. Fitch Ratings analysts said that it’s not likely to consistently align the interests of investors and originators across structured finance, which is a key objective of the European regulatory community.
The rating agency analysts said that the impact of the forthcoming risk retention requirement for European securitizations under the European Union capital requirements directive (CRD) will be highly dependent on the specifics of each securitization and on the economic environment throughout the securitization's life.
The rule might better align the economic interests of originators with those of investors, but the effects are likely to be muted for typical securitizations from established bank balance sheets.
The changes could also reduce the attractiveness of the originate-to-distribute model, especially for lightly capitalized originators, due to the requirement for ongoing originator “skin in the game”, which may help avoid some of the worst excesses of the sub-prime crisis.
The retention rule stipulates that European banks must retain 5% of securitizations that they originate and place with investors. The rule, which becomes effective in Europe in 2011, offers four options for the originator to select. These are not tailored for specific securitization types.
"Regulators are struggling with competing objectives,” said Ian Linnell, group managing director at Fitch's. “In some cases, the option under the retention rule that best achieves the stated objective of aligning originator and investor incentives may also remove the economic incentive to securitize, undermining broader regulatory and policy efforts to restore effective securitization markets."
The retention rule may also come into conflict with accounting rules and is open to interpretation; raising the potential that application of the rule could be inconsistent across jurisdictions and result in regulatory arbitrage. Fitch said that guidance from regulators and accounting standard setters will help to clarify this.