Fitch Ratings-London-22 July 2008: Fitch Ratings said today that proposed investment restrictions for European banks in relation to structured finance have the potential to resolve concerns regarding an apparent misalignment of interests between originators and bank investors. However, the agency believes the European Commission's (EC) proposals need further development to effectively address this perceived market failing. Moreover, in addressing this single issue, other unintended problems for financial markets could be created.
On 16 April 2008, the EC published a consultation paper with a number of proposed changes to the Capital Requirements Directive (CRD), some of which are intended to address perceived failings in the structured finance markets. Specifically, the EC has proposed restricting European banks from investing in tranches of transferred credit risk unless the relevant originator, arranger or manager/servicer has retained at least a 10% interest in those tranches.
"Enhanced transparency regarding originator/sponsor retained interests could allow for better evaluation of this risk by investors," says Stuart Jennings, Risk Officer for EMEA structured finance at Fitch. "However, the EC's proposals in their current form could prove overly prescriptive and have the potential to put European banks at a competitive disadvantage as investors. Furthermore, if implemented in their current form, the cost of the proposals could render the economics of some European structured finance transactions unviable. This could limit available funding options for European originators."
Fitch believes the practical aspects of application also require further definition, particularly with regard to how retained interests would be monitored, as well as the remedies for breach and the extent of intended reach. "Should these proposals become law, it could encourage European banks to seek new off balance sheet investment techniques to circumvent the rule. Off balance sheet investment structures were widely believed to have amplified the impact of the US subprime performance issues," says Mr. Jennings.
In a report published today, Fitch outlines the potential impact of these proposals and the questions that might arise upon practical application. The report, entitled "A Review of Proposed Changes to the European Capital Requirements Directive", is available on the agency's website, www.fitchratings.com.
The agency also recently published its own consultation paper focusing on increased transparency in this area, with respect to retained securitisation positions by key transaction parties. The report, entitled "Exposure Draft: Retaining Equity Piece Risk - Enhancing Transparency", is also available on www.fitchratings.com.
For topical commentary on the European structured finance market, along with global capital markets coverage, please see www.fitchratings.com/capitalmarkets. |
