Drive to Revive Securitization:Could FDIC Proposals Stall It?
March 8, 2010
Securitization markets, which seized up during the financial meltdown, have been kept alive largely due to the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF).
TALF helped stabilize the market by offering up to $1 trillion in financing for investors in asset-backed securities (ABS)-in effect creating a floor bid for the instruments.
But with TALF ending this month, the drive to revive securitization-which Wall Street and Main Street agree would be a good thing-is gaining momentum. Industry groups that include the Securities Industry and Financial Market Association (SIFMA) and the American Securitization Forum (ASF) are arguing that reopening the securitization markets is a critical factor to getting credit flowing freely to Main Street once again.
And until the data requirements are defined that will give investors confidence they can earn a return by re-entering the market, development of the digital mechanisms and communications systems that will get securitization markets back off the floor will be stalled.
In the meantime, advocates of re-starting the securitization industry are warning that efforts could be hampered by a proposed rulemaking from the Federal Deposit Insurance Corporation (FDIC) that ironically is also aimed at bring securitization back to health.
The FDIC's Advance Notice of Proposed Rulemaking, or ANPR, issued on December 15, would amend the current safe harbor treatment of securitized assets, which was created in 2000 so that investors could look to securitized assets for payment without concern that the assets would be interfered with by the FDIC in the event of a bank failure.
The FDIC wants to revise the rule to include numerous preconditions, including requirements relating to disclosure, documentation and origination of a transaction, as well as the capital that must back it and the compensation paid to parties involved.
Its aim: to regulate securitization terms and practices that it views as having contributed to the credit crisis, and in so doing, promote asset quality and restore investor confidence to the markets.
"It is important to revive securitization," Chris Killian, a vice president in SIFMA's securitization group, told Securities Industry News. "Securitization provides an avenue [of funding] between investors and originators of credit, and creates a conduit from lenders to borrowers."
But, he added, "Regulations will not make securitization come back." In particular, Killian says, "We do not believe the proposed safe harbor is an appropriate means of regulation," Killian argues that the unilateral imposition of broad-based conditions on insured depository institutions is premature.
Instead, SIFMA wants regulation to be undertaken on a coordinated basis, as part of on-going legislative reforms that are now tied up in Congress.
"Regulators acting together makes more sense," Killian adds.
SIFMA's position is largely echoed by the American Securitization Forum (ASF), an advocacy group that spun off from SIFMA in January. Despite the ASF's broader membership base-it includes many companies that are not securities firms-its position on the FDIC proposal is similar.
"Under the FDIC's proposals, investors will bear the burden of the loss of the safe harbor if any of the preconditions are not satisfied by the sponsor," said Ralph Dalosio, managing director of Natixis and chairman of the ASF board of directors, in a February 22 statement. "As an investor, it is imperative that I be able to determine whether the safe harbor will apply so that risks can be appropriately assessed and a transaction can be efficiently priced."
