The Global Financial Crisis & Asset-Backed Securitization Regulatory Responses Thereto in the EU and the United States

Abstract

In her 2009 article in the Cornell International Law Journal, Georgette Chapman Phillips posits that in order for a debt market in any country to function, one must find the following factors underpinning such market: (ⅰ) adequate legal protections, (ⅱ) strong economic foundations and (ⅲ) a low degree of political risk. Phillips discusses general legal protections, such as strong foreclosure laws, the need for stable inflation and real estate values as underpinnings of economic stability and the need for government to respect private property and contract rights. Her three-pronged focus on legal, economic and political fundamentals serves as the basis for analyzing recent and ongoing regulatory efforts in developed countries that are struggling with the important work of re-establishing stable and useful securitization markets. Presently, the United States and the European Union (“EU”) are at the forefront of financial market re regulation in the wake of the most recent banking, financial and economic crisis. Since 2007, they, like those regulators in various other jurisdictions around the world, have instituted new regulations on asset-backed securities (“ABS”). Such regulations have been part of a comprehensive, yet fairly disjointed, re-regulation of domestic and international financial markets, including previously lightly regulated areas. While their asset backed securitization (“securitization”) regulations have had some positive impact on the functionality of the debt markets in the United States, Europe and beyond, they (1) have thus far failed to provide a coherent legal framework for market participants to rely upon and have (2) increased the political risk associated with involvement in the debt markets. The disjointed and improperly targeted nature of regulatory efforts thus far are evident in the primary areas of securitization regulation thus far, the so called “skin in the game” regulations and transparency regulations. In both areas, the United States and the EU have started with similar objectives but are in the process of instituting regulatory regimes that fail to be properly coordinated within their own jurisdictions and across jurisdictions as well. Part of the reasons for this is that regulators, in a bit of panic or maybe opportunism, started the regulatory process before they could fully understand what they were regulating or the true problems they were trying to deal with. As regulators and market participants around the world endeavor to restart ABS markets or even launch them for the first time, they need to do a better job of understanding the institutions and markets they are seeking to regulate. Additionally, they need to acknowledge that no regulations can make up for prudent underwriting and thorough due diligence. No amount of regulation can force such activities to take place.