Article by Kevin Hawken , J. Paul Forrester and Dr. Ralf Hesdahl
Originally published January 26, 2011
Keywords: Article 122a, EU, capital requirements, directive, credit institutions, guidelines, Committee of European Banking Supervisors, CEBS
In contrast to the frequent criticism made of US financial reform that it is rushed and uncoordinated, the comparable European Union (EU) reforms have generally been seen as deliberate and consultative. Unfortunately, better "process" doesn't mean that EU reforms will not have unanticipated consequences. The recent Guidelines1 for the implementation of Article 122a of the Capital Requirements Directive2 (CRD) demonstrate this risk.3
Article 122a was added to the CRD on September 16, 2009 and imposed a number of new requirements on EU credit institutions in relation to "securitizations."4 Article 122a required the Committee of European Banking Supervisors (CEBS) to provide written guidelines to clarify and harmonize its application by different member states.5 CEBS published the Guidelines on December 31, 2010, on the day before the requirements of Article 122a became effective (for new securitizations issued on and after January 1, 2011).6 The Guidelines followed Consultation Paper 407 (CP40), issued on July 1, 2010 (with a consultation period that closed on October 1, 2010), which had generated significant comments from interested parties, including 18 written submissions,8 and CEBS also published Feedback9 on these submissions.
Notwithstanding this relatively consultative and deliberative process, and even though the Guidelines do address many of the concerns raised in the industry comments, substantial questions remain regarding the application of Article 122a. Importantly, these remaining questions include how the requirements apply to securitizations by US subsidiaries and other affiliates that are the subject of "consolidated supervision" of EU credit institutions.
Article 122a specifically imposes risk retention and due diligence requirements on credit institutions that invest in, or otherwise assume credit exposure to, securitizations.10 The Guidelines state that a credit institution can obtain such exposure by virtue of the relevant activities of any related entity (authorized or unauthorized) which falls within the same scope of a group where consolidated supervision is applied.11 The Guidelines take this position despite comments on CP40 which argued that consolidated application would be...