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Capital Markets

Securitization regulation: EU takes a hammer to ABS

Investors worry that proposed regulation will punish the European market for weaknesses in US sub-prime origination.

Alexander Batchvarov, Merrill Lynch

"If this goes ahead and it does not kill securitization then it will just make it very costly. That cost will be transferred to borrowers and result in lower GDP growth"
Alexander Batchvarov, Merrill Lynch

The strained relations between Europe’s securitization industry and its regulator hit a new low in July with the European Commission’s announcement of its latest plans to address the perceived failings of the market. The EC had earlier announced that as part of its proposed changes to the European Capital Requirements Directive (CRD) any originator of a securitization would be required to retain 15% of its risk-weighted assets on its balance sheet. Not surprisingly, this went down like a lead balloon with the market. "They are taking a hammer to kill a cockroach," complained Robert Plehn, head of securitization and covered bonds at HBOS, at the Global ABS conference in June. "It is completely arbitrary. On the one hand they want you to keep assets and on the other hand they want you to sell them to get capital relief."

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