For some time, commentators have wondered what to do about empty voting - voting by shareholders who lack a corresponding financial interest, for example because they have hedged their exposure (which essentially means they have transferred the risk to a third party). Empty voting is problematic because in the absence of a corresponding financial interest, shareholders lack an incentive to exercise their voting right in a way that they believe maximizes the value of the share, to the detriment of the firm and its other shareholders.
Sound familiar? It may to those who are keeping track of European and US regulators' initiatives to reform the financial regulatory framework. Both regulators are facing the question how to deal with the fact that originators of mortgage securitizations transfer credit risk to third parties. As a result of this transfer, originators lack the incentive to verify that borrowers will be able to repay their loans, to the detriment of investors in asset backed securities and, as the crisis has demonstrated, the financial system as a whole.
Here, both regulators propose the same solution: require originators or sponsors to retain an economic interest in a material portion of the credit risk of securitized credit exposures (see here and here). The US Treasury has added to this that
the European Parliament has called for a similar prohibition to be included in the proposed European regulations.
To be sure, there's a lot of differences between the two problems. Nevertheless, there remain striking similarities between the nature of the two problems. Sufficient, at least, to consider whether the proposed solutions for either problem could, one way or another, perhaps also work for the other. Thoughts, anyone?
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