Let them eat equity tranches – for real | FT Alphaville

Let them eat equity tranches – for real

Lo and behold — the draft Financial Stability Improvement Act worked out between the US Treasury and the House Financial Services Committee.

Of particular interest for structured finance watchers is this bit:

Directs the federal banking regulators and the Securities and Exchange Commission to jointly write rules to require creditors to retain 10 percent or more, of the credit risk associated with any loans that are transferred or sold including for the purpose of securitization.  Regulators can adjust the level of risk retention above or below 10 percent, but not lower than 5 percent.  In the case of the securitization of assets that are not originated by creditors, the regulators will require the securitizer to retain the credit risk. 

As Structured Finance News notes, this is along the lines of the US mortgage reform bill passed in May, which requires securitisers to hold 5 per cent of the credit risk. That bill, however, specifically exempts government guaranteed mortgages and loans purchased or securitised by Fannie Mae and Freddie Mac from the credit risk retention requirement — an exemption which does not appear to be in this bit of legislature.

As we’ve mentioned before, forcing originators to hold on to some portion of their securitisations is a step being looked at by other regulators including the European Parliament and IOSCO. The idea is to make sure originators have skin in the securitisation game, thus incentivising them to make nice and prudent securitisations. One of the sticking points is whether that would be best achieved by holding on to the equity tranche (which takes the first losses) — or a sort of `vertical slice’ of the securitisation, which would encompass all the tranches.

But whatever its ultimate form, it looks like the idea of regulatory credit risk retention is gaining pace.

Related links:
Let them eat equity tranches – FT Alphaville
Battle to restore confidence in securisation – FT
Risk retention may backfire, IMF says – HousingWire