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Despite the draft of the Liquidity Coverage Ratio buoying market players by upgrading covered bonds and broadening the scope of ABS to qualify for higher liquidity status, some critics fear that the benefits brought to structured products are much less defined and substantial. Under preliminary proposals by the European Commission, which are being discussed informally with member states and stakeholders, ABS backed by auto, SME and consumer loans would count as Level 2B buffers, haircut by 25 per cent.
Comparatively, haircuts on the most liquid covered bonds would drop from 15 per cent to 7 per cent. "Covered bonds could take an even bigger regulatory leap", said Ruben van Leeuwen, senior ABS analyst at Rabobank, "and the regulatory gap between the two asset classes could therefore widen further". According to the Commission's draft, eligible ABS would have to be rated AA- or above, which would leave peripheral players practically out of the game - a result that would conflict with policymakers' publicised goal to kick-start SME lending across the region, van Leeuewn said.
As to the definition of the underlying collateral, RMBS backed by guaranteed loans would also win better treatment under the Commission proposal, and be accepted as highly liquid - a move that would boost prospects for markets such as France and the Netherlands where mortgage guarantees are commonly used. The new draft would reintroduce a loan-to-value threshold, and include rules on back-up servicing agreements that could limit the eligibility of auto ABS. Compared with the pre-set 80 per cent LTV threshold of the Basel LCR framework, the Commission would leave it up to a "competent authority" to determine the maximum levels that should be accepted, allowing national policymakers to take into account the specificity of their local markets.