Participants in the asset securitization market warned yesterday that the complexity of the regulatory regime being implemented from the Dodd Frank Act and by European regulators could stymie the recovery of the US mortgage market, despite that recovery being their goal.
Speaking at the Asset Securitization Forum 2012 conference at the Aria in Las Vegas on Monday, the group of attorneys, bankers and policy advisors suggested that regulators would be more successful if they focused on getting a broad brush framework on the books, rather than write rules specifically aimed at preventing the last crisis.
Reed Auerbach, a partner at law firm Bingham McCutchen, said regulators should "leave deals alone that worked."
"Many would (work), if regulators did not put all asset classes in the same boat as the mortgage business,” he added, pointing to the ongoing functioning of securitization for auto loans and other assets.
He warned, “Markets that are functioning can become dysfunctional” when subject to regulation tailored for problems they did not experience.
Several speakers referred to a recent paper by Karen Petrou, co-founder and managing partner of Federal Financial Analytics, which analyses regulations for banking and other clients. Petrou’s paper, published in November, outlined the significant costs of complexity risk.
"Complexity risk creates unintended consequences and so much uncertainty that banks have largely headed for the bunker, fearful that the next rule will contradict the last proposal and pose capital, liquidity, legal and reputational risks compounding those already facing the firm under current, tough market conditions," Petrou wrote.
"We have concluded that what we call complexity risk – the burden on financial institutions and regulators of complex, cross-cutting and sometimes incomprehensible rules – may well now be the most significant impediment to financial-market recovery and robust economic growth."
Such risks, said panelist Lydia Foo, an executive director at Morgan Stanley, could result in banks and other issuers turning to other markets outside of securitization for financing.
"The regulatory burden must be weighed against other ways of financing those assets," she said. "We need to make sure it works for issuers."
amy.resnick@thomsonreuters.com
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