Shadow financial regulatory Committees: The securitization system needs to be regulated and supervised effectively
25 August 2009
A complete revision of Basel II’s approach is needed so as to correct flaws revealed by the crisis and to assure reasonable leverage ratios
Shadow financial regulatory Committees from Asia, Australia-New Zealand, Europe, Japan, Latin America and the United States have presented solutions in order that the securitization system can work well again. It is essential that investors are confident that the system is being regulated and supervised effectively.
- Transparency:
- Dissemination of and free access to all information given by issuers to credit rating agencies to enable competitors to form independent judgments of the value of the securitizations
- Disclosure of rating outcomes for all issues so that investors can better evaluate the track record of alternative suppliers of credit ratings
- In order to discourage shopping for higher ratings, require that all issuers of securitizations reveal all preliminary ratings they have received before the rating (or ratings) they choose to purchase
- One way to align compensation with the long-term interests of investors is to pay fees that are proportional to the gradual return of principal to investors. In practice this makes all of the agents in the securitization chain behave as equity holders
- Regulation:
- A complete revision of Basel II’s approach to correct flaws revealed by the crisis and to assure reasonable leverage ratios
- Increase the equity to asset ratio
- Eliminate the dependency of regulation on credit rating agencies.
- Discourage OTC derivatives when possible and, when not possible, enhance disclosure of OTC positions
- Improve regulation and supervision of monoline insurers for adequacy of reserves
- Standardization and simplicity of the structure of securitized products to enhance the liquidity of secondary markets, and to improve the monitoring of the quality of the underlying assets.
