Rethinking Regulatory Treatment of Securitisation and Covered Bonds

Abstract

Regulations for securitization have been subject to wide-spread criticism continuously. Before the global financial crisis, they were blamed for creating perverse incentives for banks and after the crisis, they are blamed for punitive treatment to the securitization market. Covered Bonds share many similarities with asset-backed securities, but they are provided favorable treatment in regulations. This discriminatory treatment has given rise to many concerns among the market participants. The present study reviews the post-crisis regulations and highlights that many of these regulations may not be justified or not be able to control the problems in the securitization market. This article introduces the concept of incremental regulations and links regulations with the scale of securitization activity followed by a bank. The article also addresses the concern about discriminatory treatment of securitization with respect to covered bonds in the European market. The article concludes that regulations should devise regulations that control the limitless securitization, but also help to restart this market.