As so to the wonderfully useful wereadEUdraftdirectivessoyoudonthaveto.com, which sadly doesn’t exist…
London bankers are up in arms over the Second public consultation paper on possible changes to the Capital Requirements Directive (CRD, consisting of Directives 2006/48/EC and 2006/49/EC).
This proposes an alleged watering down of a move by the European Commission to restrict the amount of risk originators of securitisations can transfer to other parties. The first draft suggested banks should continue to hold capital for at least 15 per cent of the securitised exposures - the idea being to “reduce the capital incentives for originators to transfer all risks of a securitisation to investors.”
The second draft reduces that requirement to 10 per cent:
Responses to the consultation were very critical about this approach. Respondents said that such a requirement would be ineffective and place EU banks that originated securitisations at a global competitive disadvantage. The Commission services have reflected further on this feedback. The result of this is that the Commission services would like to consult on an alternative requirement that takes into account many of the consultation responses:
First, the draft requirement now aims at banks acting as investors. They should ensure that they invest only in credit risk transfer products if the originators and distributors of the credit risk retain some exposure themselves (10%) – irrespective of whether they are EU banks or not. This would address the level playing field concerns raised in the feedback process. (The Commission services might also consider proposing similar requirements for other institutional investors, such as insurance and UCITS to enhance the effectiveness of the requirement and to further address potential level playing field concerns.)
Second, the draft requirement would be broad in terms of product coverage, so as to exclude the structuring arbitrage that several respondents in the consultation have warned against. In addition, those active in the origination and distribution would need to be exposed to positions with the same risk profile so that their incentives would be aligned with those of investors.
Third, the draft requirement would provide for additional flexibility compared to the original approach: it would be left to either the originators or, alternatively, the sponsors/arrangers to retain exposure, whichever would be easier to implement, in particular if multiple originators are involved in a transaction.
European bankers don’t just see this move as putting them at a competitive disadvantage to other financial sectors, they see it as a lumbering attack that will have far-reaching (and unexpected) consequences.
They say the draft directive seems to apply to any credit risk transfer instrument - so ordinary derivatives will be caught alongside more sophisticated structured products.
The London view on this is that financial services commissioner Charlie McCreevy is rushing the whole matter through because the French presidency is demanding action by November’s ECOFIN meeting. Apparently, there’s also some sort of bureaucratic race underway with teh Basel Committee.
All of which sounds very tiresome, and very believable.
Says one, well-placed financier:
Frankly, it’s mad.
Related links:
CIRCA document library (good luck)
EU Scales Back Securitization Capital Plan After Banks Object - Bloomberg
