Financial Authorities Announce ABS Improvement Plan... Industry Criticizes as "Deterioration, Not Improvement"

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[Asia Economy Reporter Koh Hyung-kwang] Regarding the 'Asset Securitization System Improvement Plan' announced by financial authorities on the 18th, the securities industry expressed a skeptical view, stating that regulations on the financial investment sector have been further tightened and the effectiveness is very low. There were also sharp criticisms calling it a 'deterioration plan' rather than an 'improvement plan.'

The Financial Services Commission announced a 'Comprehensive Improvement Plan for the Asset Securitization System' that improves the issuance method of Asset-Backed Commercial Paper (ABCP). The main point is to abolish the credit rating requirement for companies that can issue Asset-Backed Securities (ABS) and instead introduce a 'risk retention regulation' to prevent ABS from becoming non-performing and to guarantee quality. Companies with speculative-grade credit ratings of 'BB+' or lower will be allowed to issue ABS, but asset holders, etc., will be required to retain about 5% of the credit risk to ensure the quality of the underlying assets and securitized securities.

Regarding this plan, the industry raised questions about its effectiveness above all. Securities firm A said, "The most important factor in issuing ABS is the company's creditworthiness, but even if the credit rating restriction is removed, it is questionable who would buy ABS from companies with poor credit ratings," adding, "Even if the rating restriction is lifted, the conditions such as interest rates will likely be unfavorable. I don't know what follow-up measures will come out, but as it stands now, removing the restriction alone seems meaningless."

Securities firm B also pointed out, "Even companies with high credit ratings are immediately flagged within the industry as risky and advised to avoid, so ABS from companies with low credit ratings will obviously not be traded." However, he added, "If this system is a stepping stone for the government, such as the Bank of Korea, to purchase ABS from companies with low creditworthiness, then it could be effective," and said, "We need to watch the follow-up measures."

Regarding the introduction of risk retention regulations to prevent ABS from becoming non-performing, criticism arose that the government, which claims to pursue regulatory reform, is producing yet another regulation. Securities firm C expressed concern, saying, "Simple risk retention regulations that require securities companies or asset holders to retain about 5% of the credit risk of securitized securities will only increase risk without actual effectiveness." Securities firm D also strongly criticized, saying, "There are already regulations everywhere related to real estate PF, and this is just another added regulation," and added, "This plan is not an improvement but a deterioration with increased regulations."

There were also forecasts that the market would shrink significantly. Securities firm E pointed out, "The most important factor when issuing ABS in real estate PF is the company's credit, and if the lower limit on this is removed, it is questionable whether funds will come in," adding, "Removing the credit rating restriction will rather shrink the market." Another securities firm also acknowledged, "We recognize the intention of the financial authorities' improvement plan as a good direction," but said, "Concerns that the PF securitization market may shrink cannot be dismissed."

This content was produced with the assistance of AI translation services.