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five percent of something is better than fiftyfive percent of nuthing

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DEBATE IN THE EUROPEAN PARLIAMENT ON MAY 6TH 2009
ON THE TOPICS OF
CAD4 (or BASEL III) & 
THE FUTURE OF SECURITISATION

 

 

"5% of something is better than 55% of nothing" McCreevy

 

This (above, click link) is the speech of Charlie McCreevy of 6th May, to the European Parliament. [That is May 2009!]

 

 

 

How many people do you really know who would understand the point of it? I thought I would bring it to the attention of our many followers & put it on the record for my own purposes, since no-one else is reporting it.

It's McCreevy's speech to the European Parliament prior to their votes on his bill, at a first reading, legislating the budgets of CEBS etc (the 3L3), EFRAG (the accounting standards body) etc & effecting the change to CAD3 (Euro Basel II) to legislatively require first loss provision retention @ 5% in securitisation. This retention was initiated at 15% but "bargained out" by the industry and the Commission to 5%.

 

 

Note the parliament did not vote on his proposals on ratings agency reform at this session; this is the last meeting of the parliament before the elections in June.

 

 

Clearly Charlie believes that supervision is about reporting, it's not a process, its not a pompous thing run by important people or huge bloated agencies of the European Executive, its about transparency to him (an interesting position). I hadn't seen it that way before; I don' think Charlie has made his own philosophy on this so clear before. It reflects his professional background. Personally I think this is brilliant. After he leaves Brussels, would Charlie not be the optimal first chairman of NAMA in Dublin? Charlie got a hammering from some of the MEPs for bringing forward this legislation as "too little too late"; posturing of MEPs in my view; what Mr. McCreevy has achieved is simply 'awesome'! As Charlie argued himself, this is a first step in a long process. McCreevy and his staff had pushed this through in a rapid expedited process which had begun on Monday night (I think I smell the cigar smoke!) and went on through Wednesday morning; 'Trilog' is the Euro-technical term, the agreement was reached one hour before the vote in the parliament...

 

 

There had been some extreme tension on the parliament floor over the scale of the legislatively required 1st loss provision retention in issued securitisation, with a French lobby speaking up the requirement to 20%; Beres Perveche MEP made it clear that she believes that the expedited process Charlie had used to get this legislation through this week was too fast for her. She was supported by a German MEPs arguing to lift the retention number to 10%.

 

 

But Perveche did make it clear that the European parliament will address in the session immediately after the elections enabling legislation to bring forward European institutional changes to provide a basis for "Clearing Houses" for Credit Default Swaps and "Derivative Securities".  The retention figure will be reviewed at year end 2009 again by the parliament under a new European Commission in which the role of the Commissioner vis a vis Banking Supervision will possibly be made more specific, potentially with a dedicated Commissioner for Banking Supervision!

 

 

One English MEP (UK Liberal) Sharon Bowles described the Credit Crunch as a problem of the 'Buy Side' in the United States!!! Bowles though made a very astute speech, clarifying a debate which I myself have had with senior officials of the Commission; clearly the argument about whether securitisation activity should be legislated out of existence or not, has been settled at a policy level both in the parliament and the Commission. This is the first hint of more policy (and consequent enabling legislation) to come in that space, possibly including enabling legislation, similar to the CDS market initiative; clearly the Commission (and the parliament) have fully realised that Europe is dead without a wholesale Credit Market, i.e. a market in Structured Products but what we are going to see is a European 'joined up' market subsuming the unique German Pfandbreiefe process into common standards of supervision, transparency and market operation in Europe for Structured Products and Wholesale Credit Markets. This is no small task! An immediate impact (although this was not explicitly discussed) will be that the use of offshore centres specifically for the issuance of Covered Bonds like Dublin's IFSC is big-time history, in that sense Charlie is ever present; whatever he giveth, he has the power to taketh away!

 

 

Bowles argued specifically and immediately that Europe cannot continue without a wholesale credit market, she brought the logic down to brass tacks of car loans and SME loans; she argued from the perspective of the citizen. She knows what she is talking about. Her emphasis was upon the supervisory role as that of a "Quality Control Process", the retention figure being part of that; a hint that unless an originating institution had an own funds ratio higher than 25% it may not be able to participate in the new market. She also made a focus of proportionate penalties in terms of capital costs should an originating institution fail due diligence tests. Bowles made the point of why McCreevy was seeking budget for the 3L3 committees and EFRAG; "intelligent supervision" is fundamental to enabling a market sine qua non to the economic health of Europe!

 

 

John Purvis the English Tory MEP was the token voice still arguing that the first loss retention should be zero; how quickly one can become a dinosaur post credit crunch.

 

 

Reading between the lines, what I had not realised was that it is the position of the McCreevy DG that 5% is NOT ENOUGH & not only that, the DG wanted to legislatively require the formulaic calculation of 1st loss (presumably by enforcing the Gordy formula in law but Charlie indicated that was being worked on between Basel and Brussels) - McCreevy makes it clear in this speech that he has not let that one go yet.

 

 

 

 

European Parliament debate on CAD3 The Future of Securitisation

 

 

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