In this report, we assess the U. S. impact of an EU proposal to reform asset-backed securities, MBS included. The EU approach is designed to encourage securitization, in sharp contrast to the Dodd-Frank decision to throttle private-label ABS – MBS again very much included – on grounds that securitization promotes dangerous incentive misalignment unless curbed by risk retention and revs up systemic risk absent strict capital standards that push banks back to their portfolios. Because the EU’s banks have pulled back so dramatically from lending as they are being forced to rebuild their balance sheets, the discussion draft proposes creation of a class of “qualifying” ABS that would gain special benefits. Although the paper doesn’t directly take on big banks, it lauds ABS as a way to avoid TBTF concentrations – over to you, Sen. Brown. It also lays out significant EU differences on ABS regulation that could isolate the U.S. financial market in ways that impede both competitiveness and market liquidity, especially if agency paper is ever superceded by PLS.
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