Uncertainty remains over EU securitisation retention charge

The European Parliament approved the amendments on May 6, with 454 votes in favour and 106 votes against. However, it attached a caveat that the European Commission (EC) should present proposals for a possible increase of the 5% securitisation retention charge by year-end, a move that will disappoint many securitisation professionals.

The EC's original draft of the amendments, first unveiled in April 2008, suggested European banks should retain 15% of the total value of securitisation transactions they originate, ostensibly to ensure issuers share some of the risk with investors. That figure was reduced to 5% in the final proposals, following industry criticism that it would make the cost of capital more expensive in Europe.

The decision to review the retention charge again was made as a result of disagreement in the European Parliament. "It satisfied two camps within the Parliament - one camp that didn't think retention was the right way to align the interests of the banks and the investors buying the securities, and another camp that thought 5% was not nearly enough and it should be more like the EC's original plans of 15%," said a spokesman for the European Parliament.

Internal market and services commissioner Charlie McCreevy assured members of the European Parliament this week that the charge would be reviewed. "The Commission will consider the need for an increase of the retention requirement, taking into account international developments," he said. "I am pleased that the Commission has been given a second chance to tighten up the text in a report due by the end of 2009."

However, many market participants - including those investors the proposal is supposed to benefit - continue to oppose the retention charge, arguing even if it remains at 5%, it is unlikely to align the interests of issuers and investors.

"An issuer retention is an arbitrary rule that is unlikely to achieve its objectives and may indeed have unintended consequences on the securitisation market," said Johan Christofferson, managing partner at investment management firm Christofferson, Robb & Company in London. "It will obviously make securitisation a less economic option for issuers - I don't think there's a mechanical solution to solving the abuses of the past other than having a more educated investor base."

Rick Watson, managing director of the European Securitisation Forum, an industry association, declined to comment on the retention charge, but welcomed the approval of the changes to the CRD. "We're pleased that agreement has been reached in the Parliament, because it provides much-needed certainty to the European securitisation market and should aid recovery," he said.

The CRD amendments will also set limits on lending, mandating that European banks should not lend more than 25% of their own funds to any one client or group of clients. That threshold can only be exceeded for inter-bank lending, but for not more than €150 million. "Colleges of supervisors" will also be set up to increase cooperation among national regulators dealing with large cross-border institutions.

EU national governments will be required to transpose the proposed legislation into national law by October 31 2010, and to enforce the rules by the end of 2010.

See also: EC moderates CRD revisions
EC outlines changes to CRD
EC outlines changes to Capital Requirements Directive