03 November 2009
The Committee of European Banking Supervisors (CEBS) today publishes its advice on the effectiveness of a minimum retention requirement for securitisations.
Following the amendments to the Capital Requirements Directive (CRD), the European Commission submitted two Calls for Advice requesting technical guidance on the effectiveness of the minimum retention requirement for securitisations in Article 122a, the introduction of which aims to remove the misalignment of incentives between the interests of investors and those of originators in the securitisation market.
CEBS performed its analysis within the parameters already agreed for the introduction of this requirement from 31 December 2010. CEBS regrets that the very short time available to develop its advice was not sufficient to allow for a full analysis of the requirement from first principles, nor to consider in detail the impact the requirement will have both on market behaviour and on the structure of the future securitisation market. However, CEBS has examined some of the impact and market failure aspects of the retention policy.
CEBS presents its analysis and proposes in particular:
o The retention number of 5% to be kept for all four options, since a significant increase in this, or changes according to the option available, could have the unwanted consequence of undermining the ability of firms to achieve significant risk transfer. Furthermore, a higher retention requirement can be factored into the economics of a transaction by originators by increasing the pricing of such assets to compensate for it. On this basis, resetting the 5% number to a higher level does not automatically increase the alignment of interests.
o To clarify the scope of the prohibition to hedge an originator's exposures.
o All four retention options proposed by the Commission to be maintained, as each has advantages and disadvantages relative to the others.
o An additional method (so-called "L-shaped" retention) is identified, which would require further work should the Commission wish to consider its potential further in the future. However, there is currently no evidence that such a change is required at this point in time.
Franca Rosa Congiu