Capital Requirements and Supervision
Sharon Bowles, Liberal Democrat MEP for the South East of England
The agreed CRD text today in the European Parliament is a good step forward on core capital, exposures and supervision.
The securitisation provisions, now with proportional penalties for due diligence failure may not be perfect but it is fit for purpose - the purpose, to rebuild confidence and repair the securitisation market. Review at the end of the year on the retention percent, means we have covered all bases - including international coordination.
European problems with securitisation came on the buy side, from the US. But fear has dried up our own securitisation, and banks have lost the main instrument that enabled them to sell on their loans - an important instrument because it freed up capital for further lending and was a major driver for growth.
In 2006-7 European securitisations totalled 800 billion Euros, 526 billion supporting European mortgages, tens of billions each on car purchases, credit card spending and SME loans - including something like 40 billion of German SME loans: the very areas where the credit crunch is biting hardest.
And why is that? it is because bank lending is limited by their capital - and then they are stuck until either more capital is raised or loans sold on. So the sooner we can get Europe’s ‘quality controlled’ securitisation working the better.
Now it may seem that if 5% retention guarantees good behaviour of banks, then 10% would guarantee it more.
But the retained portion attracts a capital charge, and reduces the capital that can be freed up, in turn restricting lending. A 10%, during times of ongoing capital stress would just hurt borrowers and businesses, not banks. That’s why other forums, also having started higher, are tending to settle on 5% too.
But ultimately it is intelligent supervisory vigilance that will prevent future new abuses, rather than regulation for the old and gone.
Sharon Bowles is an MEP for the South East of England and has led for the ALDE group on risk and supervision aspects of markets