Is the Fed on the Side of Securitizers?
Part of Dodd-Frank required that the Federal Reserve Board publish a report on the risk retention of lenders in securitizations.
Ostensibly, the report is to be used to foist more risk retention on issuers. The only thing is the report published by the Fed last week seems to nod to leaving things alone.
[Full Disclosure: Because of my involvement in the auto finance industry, I submitted a letter on risk retention in auto ABS on request of the Fed. See it here.]
Largely, the report outlines how risk retention works in securitizations — and accurately, in my view. Then, the Fed offers fully eight factors to consider for the author of any forthcoming new rules on risk retention. They are:
- Consider the specific incentive alignment problems to be addressed by each credit risk retention requirement established under the jointly prescribed rules.
- Consider the economics of asset classes and securitization structure in designing credit risk retention requirements.
- Consider the potential effect of credit risk retention requirements on the capacity of smaller market participants to comply and remain active in the securitization market.
- Consider the potential for other incentive alignment mechanisms to function as either an alternative or a complement to mandated credit risk retention.
- Consider the interaction of credit risk retention with both accounting treatment and regulatory capital requirements.
- Consider credit risk retention requirements in the context of all the rulemakings required under the Dodd–Frank Act, some of which might magnify the effect of, or influence, the optimal form of credit risk retention requirements.
- Consider that investors may appropriately demand that originators and securitizers hold alternate forms of risk retention beyond that required by the credit risk retention regulations.
- Consider that capital markets are, and should remain, dynamic, and thus periodic adjustments to any credit risk retention requirement may be necessary to ensure that the requirements remain effective over the longer term, and do not provide undue incentives to move intermediation into other venues where such requirements are less stringent or may not apply.
To my mind, anyone writing a new rule is going to have a tough time shoehorning the changes within the above parameters. Is this going to guarantee that current risk retention rules will remain in place? Of course not. But in the world of regulators, this report amounts to a roadblock, and I can hear the sigh from West Street loud and clear.
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