On May 6 the European Parliament adopted a new Directive, amending the Capital Requirements Directives (CRD), which govern, among other things, the level of capital that banks are required to hold.
The amended CRD covers wide ground. It modernises and harmonises the regime governing large exposures, takes a major step towards a common definition of hybrid capital and puts in train a fuller review of the CRD by the European Commission, to be completed by the end of 2009. For the securitisation market, however, it is the mandatory 5% retention that is the most striking change. Originators or sponsors are required to retain a 5% interest in securitisations in which banks and other credit institutions invest. It cannot be hedged.
One of the motives behind amending the CRD was perceived weaknesses in the originate-to-distribute model, by which loans are made purely to sell to investors in securitisations. Critics argue that...