Better safe than sorry

Category: Asia, Global, U.S.A.

Coverage of investment grade credit and asset-backed securities is especially timely in view of the US Department of the Treasury’s October 6 report calling for lower requirements on banks to hold volumes of capital in reserve against securitisation, and easier stipulations on risk retention. The Trump Administration Treasury’s argument for this is that the stricter post-global financial crisis (GFC) rules have led to a drop in securitisations, and hence in lending.

“Unfortunately, post-crisis reforms have gone too far toward penalising securitisation relative to alternative, often more traditional funding sources such as bank deposits. The result has been to dampen the attractiveness of securitisation, potentially cutting off or raising the cost of credit to thousands of corporate and retail consumers”, says the report.

This, following the 2010 Dodd-Frank Act, whose provisions are administered by the Federal Reserve, the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency, the US Securities and Exchange Commission, and the Federal Housing Finance Agency.

Is it so? You could argue, reasonably, that US and other markets are not exactly starved of debt right now. Nor are they significantly underperforming. Asset prices riding historic highs are no sign of an economy in distress: if anything, it could imply overheat. And with such a worldwide hunger for yield, issuers of smartly packaged and priced securitisations or investment grade credits are liable to find eager buyers. Also, historically low interest rates dictated that credit ought to have been plentifully available.

Commentators may worry that the Trump Administration’s policymaking, driven to unravel Obama-era regulations for partisan reasons, may be untrustworthy in such a sensitive area.

But there’s a more fundamental issue here.

Remember that the whole global populist pushback against “experts” which helped propel President Donald Trump and his Treasury contingent to power, and which is putting populists in office elsewhere across the world, has one immediate proximate cause: the GFC.

That piece of regulatory mismanagement gave the entire planet one immediate and painful lesson in what happens when experts get it wrong (ask the Spanish, Italians or Greeks). And that was a lot to do with asset-backed securities.

Market players have hymned the quality and robustness of the current asset-backed security issuance regime under the Dodd-Frank Act, the Basel Committee on Banking Supervision, and the various other regulatory regimes. Discussions around Basel IV indicate that capital adequacy requirements for banks in the European Union may, if anything, become even tougher. Time to ease up on securitisation? Probably not.