Those demanding that US banks keep “skin in the game” when securitising loans should think about what type of flesh they want. Draft legislation last week proposed that issuers retain unhedged at least 10 per cent of the credit risk of a securitisation. That is higher than previously suggested (and more than required in Europe), though regulators can reduce the retained slice to 5 per cent. For now, the point is academic. Lack of investor interest in anything but top-rated securities means issuers often retain all subordinated tranches, perhaps 12 to 15 per cent of a deal.

Once risk appetite returns, however, ambitions to tie a securitiser’s fortunes to that of investors’ will need more nuance. Leaving details to regulator discretion, including possible exemptions for mortgages securitised by government-sponsored enterprises, lacks much-needed clarity. Any presumption, meanwhile, that banks should retain a first-loss equity slice may be flawed. The International Monetary Fund notes this provides little incentive to screen a loan pool for quality when a likely downturn means the equity will be vulnerable. In contrast, retaining a “vertical slice” that goes through each credit tranche, or mezzanine exposure that sits somewhere in the middle, could lead to more thorough screening.