Despite the holidays, FedFin continued late last year to alert clients to several major developments, as well as to provide in-depth analyses of actions with strategic impact in 2015. One area with significant market and policy impact is the emerging regulatory framework governing asset securitization. The new Basel standards will be implemented in the U.S. in conjunction with other capital rewrites, but they create a near-term framework with considerable impact for U.S. ABS issuers and for those working out GSE risk-share transactions now and statutory rewrites later this year.
As we noted in FSM Report ABS37, the new global framework is important not only in its own right, but also because Basel’s conservative approach has left the EU very, very unhappy. Combined with the furor late last year over Basel’s decision to chastise the Continent for non-compliance with the overall capital rules – not to mention increasing disagreement over the liquidity and resolution frameworks – a critical 2015 issue is the extent to which the overall global framework withstands attack.
Importantly, the ability of the U.S. to participate meaningfully in global deliberations is also under fire. Legislation will shortly be reintroduced to restrict the FRB and other agencies from agreeing to anything Basel does without extensive public scrutiny (see FSM Report FEDERALRESERVE17). Basel’s decision to issue its new standardized credit-risk rules right before Christmas forestalled a firestorm. But, as you will see in our forthcoming in-depth report, Basel’s proposal will arouse strong community-bank opposition to changes proposed in hot-button areas like residential mortgages, small-business lending, and commercial real estate.
Basel knows full well how fragile it is. Thus, in conjunction with the new securitization-capital standards, it and IOSCO laid out new standards defining simple, transparent, and comparable ABS. However, FSM Report ABS36 demonstrates that these standards are so vague and divorced from actual credit risk as in our view to have little impact on the new capital framework. As a result, they may buy Basel some time, but not protection.
FedFin has extensive client reports related to asset securitization, focusing in particular on policy drivers that determine competitiveness based on originator and issuer incentives vis-a-vis portfolio lending. This issue is particularly critical for housing finance, where regulatory incentives have been particularly strong drivers of business to the GSEs and FHA, as well as determining market pricing for RMBS and risk-share and risk-transfer structures. With President Obama set later this week to speak on the future of housing finance, these policy drivers are clearly critical for market strategy in 2015. We would be pleased to address any questions you may have – please advise us via e-mail at email@example.com.