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Weekly Industry Update: March 6, 2016

By Vy Phan

March 6, 2016

ABS Vegas, the world’s largest securitization conference, drew a record number of attendees this year. Marketplace lending was the topic du jour. PeerIQ participated on the “Development of Securitization in Marketplace Lending” and “Future of Regulation in US Marketplace Lending” panels. The panels were standing room only, underscoring interest in this rapidly growing market. Positive Impact of Securitization on Real Economy SEC Commissioner Piwowar’s keynote speech highlighted the benefits of the ABS market: "Securitization can transform illiquid assets like mortgages, auto loans, credit card receivables, and future sales of David Bowie albums into marketable securities . . . securitization supports economic growth, business development, and job creation.” The commissioner cautioned on the potential for regulation to stifle securitization and, by extension, credit extension: “...we must keep in mind that unnecessary or inappropriate regulation of securitizations may lead to less availability of capital, increased borrowing rates, and a more limited supply of credit.  These effects are likely to be passed on to borrowers, either in terms of increased borrowing costs or loss of access to credit, and thus will cut directly against the benefits of securitization.” The commissioner also made reference to the Eurozone market where, along with China, policy-makers are taking steps to grow the ABS market and reduce reliance on bank funding. We believe current and proposed capital and liquidity rules, particularly when combined, will have the effect of deterring banks from holding and making markets in ABS. Specifically, We recommend Richard Johns’ SFIG testimony for more explication of the above. The consequences of current and proposed regulations are significant as banks currently hold around 15-20% of ABS at any given time.  Indeed, banks are responding to incentives by shrinking balance sheets and shedding businesses that cannot clear ROE hurdles after capital charges. As an example, we predict that Citi’s CHAI securitization which funds US consumer loans, will sunset after risk retention rules kick-in in Dec 2016. We see the impact of the above liquidity and capital rules impacting the markets today. Bid-ask spreads are tight during benign times. Yet we see liquidity vanish during distress. In January, we saw the funding chain linking originators to the ABS market break down. We see deals that price wider than their warehouses lines. By 2020, after regulations phase-in, we see a radically different ABS market emerging. A number of additional regulations are re-shaping market structure. We view the following as positive for markets as they reduce informational asymmetries and promote price discovery. For instance: Shared utilities - clearinghouses, data & analytics, exchanges - will assume an increasing set of functions that dealers have historically provided. Against this evolving landscape, platforms such as PeerIQ and others will play a role in enabling consumer and small business credit to successfully fund via the capital markets.  Conferences: Industry Update: PeerIQ Press: