MIAMI — Although some smaller banks such as Fifth Third Bank and USAA Federal Savings Bank have issued auto ABS deals in recent weeks, it will become increasingly hard for these smaller regional banks to keep up with capital requirement regulations through 2019, said Stuart Litwin, Mayer Brown LLP’s co-head of securitization.
Regulations require financial institutions to hold 8% of their balance sheet against auto loans, which is a lot for banks that largely deal in super-prime assets that are only expecting losses under 1%, he explained during a panel at ABS East yesterday.
“There are lots of regulatory reasons that I think we’ll see capital requirements for banks go up every year through 2019,” Litwin said. “It will be harder for banks to stay in the auto lending business through 2019 if they don’t figure out ways to deal with [regulation of securitizations].”
Yet, for larger financial institutions the weight of regulation has largely subsided for the first time in years, panelists and credit agencies told Auto Finance News. Earlier this year, there was concern about the implementation of Reg AB II, which requires asset-level information for assets in securitized pools and risk retention structures. However, to date, banks have been able to manage the regulatory environment and the pace of issuance hasn’t been impacted.
However, next year there could be pressure from an unlikely source — credit unions.
In late June, the National Credit Union Administration (NCUA) released a proposal that would allow credit unions to securitize auto loans. These financial institutions have greatly grown their auto lending activity in recent years and have only been permitted to conduct whole loan sales.
“Credit unions have a substantial marketshare in auto lending, and auto loans are the credit unions’ fastest growing and most widely offered product,” the NCUA wrote in its proposed rule.
Still, credit unions will face the same issues that smaller banks are experiencing in the space and will have to overcome that regulatory burden, Litwin said.
“Credit unions are coming on the scene,” he said. “If they want to do an on-balance deal, they will have to comply with the NCUA safe harbor, which also requires them to disclose Reg AB II asset-level data.”
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