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In May, the European Commission made a highly controversial proposal to raise the minimum capital charge rate for securitised credit products to 15%. This proposal was included in the proposal for technical draft amendments to the Capital Requirements Directive (CRD) issued in May, consultation for which ended on June 18th. Subject to responses, these amendments were due to be adopted in September. However, last week, after a torrent of adverse comment on the issue, the EC drew back from this proposal.
The 15% proposal, which many feel has been tucked away within the document in an attempt to avoid debate, was never going to be adopted without a fuss, as the responses have shown. Four leading financial services industry associations – the International Swaps and Derivatives Association (ISDA), the European Securitisation Forum (ESF), the British Bankers’ Association (BBA), and the London Investment Banking Association (LIBA) – wrote to EU Internal Markets Commissioner Charlie McCreevy voicing concern. They said there were better ways to solve the problems of the ‘originate-to-distribute’ model where institutions group mortgages and other types of loans into a single package and sell this as securitised credit products.
Barclays responded with the following comments on the 15% proposal, “The risk/market failure that this proposed amendment is trying to mitigate is not clear to us. We assume that it refers to concerns regarding the “originate to distribute” model. However, we think that this proposal runs counter to the concept of significant risk transfer and may generate perverse behaviour by firms.” They go on to say “We do not regard this amendment as a technical amendment; rather we regard it as a new requirement, which will require consultation, including a market failure analysis.”
When, on Monday, the EC published its feedback report, they said “In light of these arguments, the Commission services no longer propose to impose a 15% capital requirement on securitised assets. The Commission services will go forward with qualitative disclosure requirements to better align investor and originator interests. On the quantitative requirements, the Commission services will consider alternative arrangements to better align originator and investor interests and what incentives for originators and information requirements for investors should be included, if appropriate, in its proposal.”
What will these alternative arrangements? Many bodies, such as the European banking unions, are not prepared to allow the current controls to remain unchanged.
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