Regulators are shifting their view on securitization from being highly suspicious to realizing it is an integral part of the financial markets. Securitization industry players now see the importance of regulatory involvement to get the market back on track, said speakers at this year's European Securitization Forum/Information Management Network Global ABS conference.
"Unfortunately, most European politicians' first impressions of the securitization market were wrought by the crisis," said Donald Ricketts, head of financial services and senior vice president at Fleisman-Hilliard. "For Europe, securitization was perceived as the way by which the economy contracted the U.S. illness. Against this backdrop, politicians believe that if they purged themselves of securitization, the world would be a better place."
Luckily, regulators aren't politicians and, for the most part, have kept a cool head on their approach to reshaping industry regulations. "The worry in the beginning was whether securitization would survive; now there is no debate," said Jason Kravitt, senior partner at Mayer Brown. "Somehow people understood that to get out of this mess you need securitization. But securitization is a hard concept to understand, even in its simplest form."
In Europe, the challenge has been to coordinate regulation across jurisdictions and avoid divergence of implementation between regions. For instance, the U.S. is looking to implement something similar to the Capital Requirements Directive (CRD) 5% retention rule, which requires originators to retain 5% of the securitized products they originate. However, it is unlikely that the regulatory requirements would be adapted the same way as they had been in Europe. "The U.S. will have something to lean on, and if they are wise they will take notes," a panelist at the conference said.
Coordinating regulation needs to happen across the board, both vertically and horizontally, to avoid potential inconsistencies, Kravitt said. "There's a broader horizontal coordination that is utterly lacking," he said. As an example, he pointed to the Basel regime that rewards removal of risk, while the Capital Requirements Directive requires issuers to hold on to it. "It makes you wonder if these entities are even talking to each other," he said.
Piecing together regulatory efforts in Europe has proved difficult, Ricketts said. "You don't have a Timothy Geithner in Europe; you don't have a European finance minister," he pointed out. "There is not one set of European purse strings today."
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