Let the race to the bottom begin – and may the odds be ever in your favour

Today, the Financial Times reported that international investors were increasingly worried about the differences in treatment of securitized mortgages in the European Union and the United States [here]. While in the US capital requirements for securitizations follow the prescriptions of the Basel Committee of Banking Supervision (BCBS), the European Commission is considering legislation under its new Capital Markets Union (CMU) agenda to set up a separate market niche for so-called Simple, Transparent and Standardized (STS) securitizations [see here and here for descriptions and criticisms]. Part of the attractiveness is that they would come with lower capital requirements. US banks now fear that US securitizations will be priced out of the market, while European banks worry that they won't be able to sell STS securitizations to the American market. 

The report quotes a couple of bankers from global banking groups who bewail this as increasing financial 'fragmentation' and the re-domestication of banking – which to bankers is like rewinding history. Nomura apparently described it as the institutionalization of a 'backyard bias', which sounds like financial NIMBY-ism, and again goes against the grain of the movement towards global, integrated effecient financial markets which was the storyline before the crisis and apparently still is the mindset of global bankers.

Even more striking was the emollient tone of the EU official quoted in the report. S/He basically stated that there was nothing to worry about because under the STS scheme you could securitize any raw material, no matter its domestic origin. And that there was still plenty of opportunity to modify the current proposal.

Moreover, Basel has apparently launched its own version of the ECs initiative. Under the label of STC (Simple, Transparent and Comparable) it has recently launched a similar consultation paper [see here], which closes on February 5. So even if the ECs STS initiative makes it through the European Parliament and gets adopted, US banks will be at a disadvantage for only a brief span of time.

The upshot: let the race to the bottom start again – and may the odds ever be in your favour.