Building on recent standards issued in conjunction with the International Organization of Securities Commissions for “simple, transparent, and comparable” (STC) securitizations, the Basel Committee has proposed new risk-based capital standards designed to reward STC-eligible issuances. This reflects efforts in the European Union to restructure financial markets so they are less dependent on credit origination by banks, as well as ongoing U.S. interest in developing private-label securities (PLS) to reduce the role of governmental and agency mortgage securitization. However, the proposed capital relief may prove insufficient to restart securitization, especially given all the other rules applicable to banks, unless or until non-banks play a greater role in asset origination. This is beginning in earnest in the U.S., where – despite concerns about “shadow banking” – non-banks have long been major players in residential and commercial mortgages and in auto finance, and where they are playing a greater role in small-business lending with the growth of online marketplace finance. Preferred capital has no direct impact on these non-banks, but it could increase the bank market for ABS unless the other rules are revised and cease to suppress investment appetite, which seems unlikely.
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