State aid for ABS market may hinder recovery – IMF

The IMF has stressed the importance of a recovery in the securitisation market, but warns that some of the state interventions in the market over the past year may be counterproductive.

In its latest Global Financial Stability Report, the IMF says securitisation is vital to a healthy lending market and regulators and central banks have the right objectives in mind: to clear away unreliable ‘legacy’ securitised products and restart the private-sector securitisation business on firmer foundations.

However, some of the short-term efforts to keep the financial markets liquid, introduced at the height of the crisis last year, may undermine the longer-term goal of a restored and reformed securitisation industry.

One objective is to lessen reliance on rating agencies, the IMF says, but “the longstanding use of credit ratings to screen eligible collateral for various central bank liquidity backstop facilities is viewed as encouraging rating shopping.”

It adds: “Evidence is accumulating that rating shopping was rampant during the period leading up to the crisis.”

Other regulators tend to rely on credit ratings – for example, in restricting the holdings of pension funds – although the IMF acknowledges efforts by the US government to reduce regulatory dependence on ratings.

Changes to the Basel II capital adequacy rules, while necessary, will also make securitisation more costly by increasing the risk weighting for various classes of asset.

“The interaction of these changes with new accounting standards and proposed retention regimes makes their impact on securitisations uncertain,” the IMF says. It speculates one outcome may be a growth in securitisation by entities such as hedge funds that are outside regulators’ reach.

Regulators have also been pushing for issuers to retain a stake in any securitised products they produce but this will not always work, the IMF warns. In a recessionary environment with generally low underlying loan quality, the equity tranche is almost bound to be wiped out; forcing issuers to hold an equity stake gives them no incentive to improve due diligence.