Tuesday, January 12, 2010

5% retention Rule, A Small Positive Step – Fitch

Original posted on the International Securitization Report:

The EU retention rule that will from next year force European banks to retain 5% of securitisations that they originate and place with investors is a "small" but "positive step", Fitch said in a report.

The rating agency believes that on balance, the new rule will help better align the economic interests of originators with those of investors. But the effects are likely to be muted for typical securitisations from established bank balance sheets. The changes may, however, reduce the attractiveness of the originate-to-distribute model, especially for lightly capitalised originators, due to the requirement for ongoing originator "skin in the game", which may help avoid some of the worst excesses of the sub-prime crisis, Fitch noted.

Fitch warned that in "some cases, the option under the retention rule that best achieves the stated objective of aligning originator and investor incentives may also remove the economic incentive to securitise, undermining broader regulatory and policy efforts to restore effective securitisation markets."

Moreover, this rule does not deal with the key problem of "asymmetric information" -- originators will continue to have more information than investors regarding their underwriting and servicing standards and are free to choose the retention option that suits the originator best, Fitch explained.

Finally, the retention rule may also come into conflict with accounting rules and is open to interpretation; raising the potential that application of the rule could be inconsistent across jurisdictions and result in regulatory arbitrage, Fitch pointed out.

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