The Loan Market Association (LMA) has struck back at the Financial Stability Board’s (FSB) positive initial assessment of post-2008 securitisation reforms, stating that the impact on collateralized loan obligations (CLOs) has been “stifling”.
The FSB published its consultation report on securitisation reforms in early July, aiming to determine the extent to which the risk retention and higher bank prudential requirements implemented since the global financial crisis have been effective. Alongside this, it sought to look at the broader effects of the reforms on both the functioning and structure of securitisation markets and the financing of the real economy.
In its preliminary analysis, the FSB noted that the reforms have improved securitisation market resilience “without strong evidence of material negative side-effects on financing to the economy”.
In its response to the consultation report, focusing on CLOs, the LMA disagreed. Post-2008 regulatory reforms, including those around risk retention and prudential requirements, “were and are unnecessary and have stifled what has been a key source of funding for corporates that access the European broadly syndicated leveraged loan market”, it stated.
Nicholas Voisey, managing director at the LMA, acknowledged that reforms were well-intentioned but excessive. “Whilst much of the regulation following the GFC was necessary and proportionate to reduce systemic risk, we believe that in the case of CLOs, regulation has gone too far and is not necessary given the robustness of the product, which has been evidenced, not just through the GFC but since,” he commented.
CLO structures were resilient during the financial crisis and have continued to be so in later cases of market disruption, the LMA argued in its response, stating that annual default rates for CLOs were “a fraction of the annual default rate of investment grade corporate debt” and never exceeded 0.5% between 2001 and 2023. Since 2008, and the establishment of the European CLO 2.0 in 2013, “not one of these securities has defaulted”, it added.
The FSB’s final report is expected to be published at the end of the year.
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