Global Financial Crises and the Future of Securitization

2523 Words Mar 1st, 2012 11 Pages
GLOBAL FINANCIAL CRISES AND THE FUTURE OF SECURITIZATION

Contents

1. Introduction……………………………………………………………………...3
2. Overview………………………………………………………………………...3
3. Structured-finance securitization ………………………………………………..5
4. Key segments of the securitization market………………………………………6
5. Rating Agencies Deficiencies....................………………………………………8
6. Future of Structured-finance securitization……………………………..……...10
7. Conclusion................................................…………………………………...…11
8. References………………………………………………………………….......12

LIST OF FIGURES

Figure 1. Securitization markets: key participants…………………………………4
Figure 2. European securitization issuance 2002-2010…………………………….7
Figure 3. American securitization issuance
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Ironically, risk concentration turned out to have risen sharply, and was a key contributor to the widespread banking sector losses witnessed during the global financial crisis. In the run-up to the financial crisis, banks were allowed to significantly leverage up their balance sheets with limited disclosure, concentrating both their investment and funding needs in an asset class that proved to be illiquid at the first signs of financial stress. Financial stability was also weakened because securitization led in several instances to a lowering of banking standards[2]. A number of new structured products became overly complex and opaque, while risks were seriously underpriced[3]. The considerable size of the securitization markets made them an important factor in the global “liquidity-cum-credit crisis”.
However, it is important to note that not all structured-finance securitization was as unsound as was the case in the US subprime mortgage sector[4], which by itself represented less than 10% of all US securitised mortgages. Securitization acted primarily as a legitimate funding tool in Europe, as opposed to securitization being an “end in itself” for capital arbitrage reasons as was often the case in the US. Moreover, there was much less disengagement by European underwriters (and hence, more “skin in the game”) than by their US colleagues, and regulation and underwriting standards were…