• SEC Cracks Down on 'Quality' of Credit Ratings
• European Securitization Market Picks Up with $6.4bn RMBS Issue
• Danish banks urge changes to Basel III
• New RMBS Seeing Some Success Abroad
• FDIC Safe Harbor Changes Could Risk Investor Confidence

The Council of the European Union on Monday adopted new regulations imposing a legal framework on credit-rating agencies and introducing the requirement of 5% risk retention by originators.

A major directive within the new regulations tightens capital requirements for European banks. In an effort to improve the framework for securitization practices, the regulation requires originators to retain 5% of risk transferred or sold to investors. Trade groups Stateside remain categorically opposed to a 5% risk retention.

The European rules also strengthen supervision of cross-border banking groups, harmonize the classification of banks' Tier 1 capital funds with hybrid instruments, introduce rules on liquidity risk management and tighten the supervision of exposure to a single counterparty.

Another new regulation aims to ensure the credit-rating agencies (CRAs) avoid conflicts of interest or at least manage them properly, to improve the methodologies used by CRAs and the quality of their ratings and to increase transparency by setting disclosure obligations for CRAs.

The regulation provides for a legally-binding registration and surveillance system for CRAs intended for use in the regulatory process.

The news comes as spreads on UK residential mortgage-backed securities (RMBS) deals have tightened below 200 bps. Deals that already exist in Europe are trading at non-distressed levels, but the European secondary market hasn't seen new RMBS issuance for some time.

Sources HousingWire spoke to said third-party investor interest may be rising to a point where the issuance of a new RMBS in Europe is becoming more likely. Such regulation, however, is likely to dampen that mood. Nonetheless, spread levels — a barometer of the economics of structured finance — are tightening across most markets. In the securitization market, for example, non-syndicate trades is growing more bullish, with spreads dipping below the 200 basis point level regularly for specific deal.

Overall progress in financials remain contracted: The European push for covered bonds is dying down somewhat, sources tell us, after a rally ealrier this month. Furthermore, credit among UK banks remains restricted, despite government efforts to boost liquidity.

The Bank of England (BoE) Asset Purchase Facility Fund, which was set up to purchase private sector assets financed by Treasury bills in order to facilitate the flow of corporate credit. BoE purchased £84bn (US$138.56bn) of assets in Q209, according to data released Monday. Total purchases under the program are up to £99.09bn, including £15.09bn purchased in Q109.

Write to Diana Golobay.