Axford in Asset Securitization Report on Proposed Capital Requirement Increase

Axford in Asset Securitization Report on Proposed Capital Requirement Increase for European Asset Backeds

Asset Securitization Report recently interviewed London-based Finance partner Stuart Axford in “Tang to Play to Full House at Global ABS Confab” regarding his thoughts on European Union Parliament member Paul Tang’s proposal to increase the capital requirement for asset-backeds to 20% from 5%.

In both Europe and the US, regulators have adopted rules requiring securitization sponsors to keep a 5% interest in their deals in an effort to align their interests with those of investors. The idea is that this will discourage the kind of risky lending that contributed to the 2007-2008 financial crisis. The rules have proven particularly problematic for managers of collateralized loan obligations, which do not originate the loans that they securitize and have little capital of their own to put to work.

Tang said that the 20% rule should apply to all European transactions, regardless of whether they comply with the proposed framework. This proposition is an effort by policymakers to create standards for deals that could qualify for less difficult capital requirements if they are “simple, transparent and standardized.”

Axford, who will be attending IMN’s Global ABS Confab conference where Tang will provide the keynote addressing the report, said "The European market was surprised by how off-message this report comes across as compared to the wider EU agenda on promoting securitization…In particular, the 20% number seems to have been plucked from thin air."

While the plan appears to face the odds of becoming the new benchmark, "People have been trying to rearrange their flights to make this," adds Axford.