Restarting Securitization Markets

Although recent public opinion has focused on what went wrong with securitization, it is important to recognize the many benefits associated with sound securitization.

Tuesday, September 22, 2009

Global Financial Stability Report (GFSR), October 2009 - Chapter 2

Key points:

Sound securitization provides important benefits—to allocate credit more efficiently, transfer credit risk away from banking sector to more diversified investors, and more finely tailor risks and returns to potential end investors.

Failure to restart securitization would come at the cost of prolonged bank funding pressures and a diminution of credit, and a continuing need for central banks and governments to take up the slack.

The new model of sound securitization should leave behind the “high octane” markets of the past and establish markets that reliably fulfill lender funding needs without increasing product complexity and ramped up leverage.

The variety of proposals to restart sustainable securitization—increased capital requirements, tighter accounting standards for off-balance sheet entities, retention requirements, and enhanced disclosure requirements—all move in the right direction.

However, if all are implemented in combination, the interaction of these proposals could make restarting securitization too costly. Impact studies should be conducted before such proposals go into effect to ensure that, in combination, they foster—not suffocate—sound

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