This item came from reader Chris, who passed along a tidbit from Wolfgang Munchau’s Eurointelligence daily newsletter. I can’t provide a link to the story itself; checking around the Eurointelligence site, it seems to be an e-mail only product, and the piece in question is based on a German news story.
The proposal is odd. It would restrict EU banks from selling securitized products unless the seller retains a stake of 10% or more. Given that the banks have quite a lot of US paper, constraints on purchases would seem more sensible (assuming that the intent is the obvious, which would be to restrict this activity).
Perhaps the logic is that the EU will use this move as a basis for demanding that the US institute reforms of its securitized debt market, or it will impose similar restrictions on buyers. I’d be interested in hearing of any other theories.
Chris also believes “cracking news story” = “breaking news story”.
From Eurointelligence:
FT Deutschlands leads today with a cracking news story according to which the European Commission is planning to put severe restriction on the ability by banks to participate in the global credit market. The most important of these restrictions concerns a rule that it will only be legal to sell securitised debt instruments, such as asset backed paper or the more compilcated collateralized debt obligations if the issuer retains a stake of at least 10 per cent. (We find this is a very sensible attempt of a regulation, and perfectly compatible with the original intention of the securitisation business. The fact the banks were able to see credit products without retaining a stake was clearly one of the factors that help create the credit bubble.)
The European Commission also wants banks to restrict the amount they lend to other banks to no more than a quarter of their tier one capital.
It is no surprise that the European banking lobby is howling with protest, saying that more transparency will do the job.
Update 10:50 PM: Per an anonymous reader, it appears the Eurointelligence piece had an important translation error:
There seems to be a translation error in the Eurointelligence snippet. They write of a proposed restriction on what European Banks can sell. In actuality, the FTD article is about a proposed restriction on what European Banks can buy (‘kaufen’); i.e. only securitizations in which the seller keeps 10%.
This makes it an effective rule regardless of what non-European governments decide to do about the securitization market, even if they decide not to act. The result would be that European Banks could no longer buy nonconforming securities from anywhere in the world, leading to some protection of European Banks from such toxic waste as repackaged US subprime debt or whatever the future will bring.
In fact, the article emphasizes the bailout of banks like IKB at (German) taxpayers’ expense because of their extensive investments in US subprime debt.
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Wouldn’t this kind of ipso facto restrict the buying of this debt, since almost no issue probably currently qualifies and hence is “illegal?”
Like bob-in-ma I took it to mean that if Fannie or Freddie want to issue Mortgage-backed securities, even Morgan Stanley, they would need to hold on to 10% of the issue. If they won’t hold their own issues why should anyone else, at least in Europe. I thought the Tier One Capital requirement was kind of interesting too, not off-balance sheet and secured. Big change if that is what is.
I could be wrong here but didn’t we find out in the last round that the banks kept a lot of the securitized debt they told us they sold. I don’t know if it was 10% but it seemed to be a good sized chunk. Remember, they were all OK because they laid off the risk but then it turned out they were just kidding us.
Tom, that was pretty much only Citi and Merrlll, and most saw it as a sign of bad management. You don’t choose to retain a big chunk of an underwriting.
Now some deals were structured so that the packager kept the equity, but that was more than a bit of optics. They took so much in fees off the top that the equity could be and turned out to have been worth zero and they still did very well. At least until their trading inventory plummeted.
There seems to be a translation error in the Eurointelligence snippet. They write of a proposed restriction on what European Banks can sell. In actuality, the FTD article is about a proposed restriction on what European Banks can buy (‘kaufen’); i.e. only securitizations in which the seller keeps 10%.
This makes it an effective rule regardless of what non-European governments decide to do about the securitization market, even if they decide not to act. The result would be that European Banks could no longer buy nonconforming securities from anywhere in the world, leading to some protection of European Banks from such toxic waste as repackaged US subprime debt or whatever the future will bring.
In fact, the article emphasizes the bailout of banks like IKB at (German) taxpayers’ expense because of their extensive investments in US subprime debt.
A second FTD article calls the proposal clever, which seems to be a reasonable assessment.
In sum: (European) Banks would probably be less risky if they could only buy complicated securitizations where the selling bank kept 10% on the books.
Sorry to be pettily competitive, but I’d like to point out that EuroWeek broke this story two weeks ago.
The devil is really in the detail. The most important being that it doesn’t just cover securitisations, but any “credit risk transfer product”. This explicitly includes credit derivatives and syndication. The impact of the proposal goes much, much further than “complicated securitsations”.
The second important thing to consider is that it doesn’t just require the originator/arranger/servicer (as relevant) to hold 10% of the total exposure. It requires the originator/arranger/servicer to hold 10% of each tranche it wants to sell to a bank.
The third is that there is nothing in here to stop banks from buying subprime debt per se. If a bank with a large balance sheet is active in the non-conforming sector (like HBOS, say) they could probably to retain the required 10%. Of course, big banks like that would probably prefer to fund those mortgages on balance sheet anyway, given the spreads on non-conforming RMBS. And specialist lenders without big balance sheets behind them will find things very difficult. This applies to other, prime sectors as well – conduit CMBS being the most obvious example. This market is dead for the foreseeable future anyway, given the condition of banks’ balance sheets, but the proposal almost guarantees that it won’t come back.
Finally, this rule would have made almost no difference to the IKB situation – IKB held almost all of its subprime assets through an off-balance conduit and an SIV, which wouldn’t have fallen under the provisions of the directive.
FYI, CreditSights has a report up on it as well. If you ask them, they’ll probably let you reproduce some of it.