A key U.S. bank regulator voiced concerns about proposals to require securitizers to retain some of the risk of debt converted into securities and sold to investors, saying rigid rules are not the best solution.
Comptroller of the Currency John Dugan, who regulates the nation's largest banks, said on Tuesday that forcing banks and other securitizers to meet mandatory risk retention requirements is an imprecise solution to improve the lax underwriting that fueled the subprime mortgage crisis and subsequent financial meltdown.
President Barack Obama and House Democrats favor requiring banks and other securitizers of loans, such as mortgages, to retain on their books at least 5 percent of the risk of debt converted into securities and sold to investors.
That way, lenders would have more of an interest in ensuring that borrowers they lend money to can pay it back, according to backers of the so-called 5 percent "skin in the game" rule.
The Senate has proposed a more strict 10 percent threshold for risk retention.
"Instead of going at the underwriting problem indirectly through skin-in-the-game requirements, why not attack it directly?" Dugan said in prepared remarks to a securitization conference.
He said a more effective solution could be regulations for minimum underwriting standards that would apply to all loan originators, to ensure a level playing field.
Regulators are seeking ways to revive the securitization market in a responsible way to increase credit availability after the market virtually froze during the financial crisis.
Securitization of poorly underwritten loans allowed the subprime contagion to spread widely when housing prices dropped dramatically.
Dugan said rigid risk retention requirements raise significant accounting and regulatory capital issues because of recently issued standards and rules affecting the off-balance-sheet treatment of securitized assets.
Those rules, which took effect at the beginning of the year, forced financial firms to move many previously securitized assets back onto their balance sheets. Also, regulations will require firms to hold more capital against these securitized assets that have been brought back on the books.
"The OCC supports these accounting and regulatory capital changes because we believe they more appropriately align securitizations with risk. But they do raise fundamental and difficult questions," Dugan said.
He said there is a risk that such new rules may impair the development of a robust securitization market.
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