As well as potentially helping to broaden the range of investors, the STC criteria should make risk transfer more robust. And third, to help regulators. Setting risk sensitive capital requirements for securitisation tranches is challenging. One solution is to use credit ratings but the shortcomings of that approach were exposed during the crisis. Another is to use a regulatory formula capturing dimensions of risk such as the credit quality of the underlying pool, tranche seniority and maturity. In our view, including a differentiation based on STC in that capital calculation helps to capture other important dimensions of risk related to structure, transparency and governance. Because one of our objectives is to broaden the investor base, it is important that the STC designation makes things simpler for investors, particularly non-banks. For example, they should be able to place greater reliance on it when conducting their own due diligence on matters covered by the STC criteria, such as risk retention. Investors would thus be in a position to concentrate with more confidence on other, existing due diligence requirements, such as in relation to the creditworthiness of the underlying assets and cash flows characteristics. The implementation process for the STC designation is therefore important. In our view, the primary obligation should be on the originator to attest compliance with the criteria. But this needs to be in the context of a regulatory regime with effective supervisory oversight and sanctions. We must also be careful not to label all non-STC transactions as “bad”.

Residential mortgage-backed securitisation (RMBS) was the largest part of the EU market before the financial crisis and the subsequent decline in the overall market is primarily explained by the fall in RMBS issuance. A large part of that decline may be explained by fundamentals – banks have cheaper ways to finance themselves at present. But, in the long run, I think we will need robust RMBS markets so that at least part of the risk on long-term housing lending is financed from long-term savings rather than short-term bank deposits. I prefer to focus on the long-term goal of building sustainable securitisation markets rather than reviving securitisation in the short run. Comparing current issuance with pre-crisis levels misses the point that the pre-crisis market was fragile, based on investment by leveraged funds and bank treasuries. Building a stable market will require a broader, real money investor base. The market also needs to be based on genuine risk transfer not regulatory arbitrage, such as synthetic sales of thin mezzanine tranches intended to maximise the reduction in regulatory capital at minimum cost. I hope the future will be transactions in which banks look to sell down the capital structure, subject to meeting risk retention requirements. Transferring the entire risk on a portfolio will be the only way to achieve a reduction in the exposure measure used for the leverage ratio. And the new Basel risk-weighted capital requirements announced in December also move in the direction of incentivising transfer of senior as well as mezzanine tranches of portfolios.