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There have even been offerings of securities underpinned by more esoteric sources, such as cashflows from solar panels or home-rental income—the sort of gimmick once derided as a boomtime phenomenon. Excluding residential mortgages, where the American market is skewed by the participation of federal agencies, the amount of bundled-up securities globally is showing a steady rise.
The comeback of securitisation is related to the growth in economic activity: in order for car loans to be securitised, say, consumers have to be buying cars. Investors desperate for yield are also stimulating supply: securitised paper can offer decent returns, particularly at the riskier end of the spectrum. More important, though, is the regulators’ enthusiasm.
Policymakers want to get more credit flowing to the economy, and are happy to rehabilitate once-suspect financial practices to get there. Some plausibly argue it was the stuff that was put into the vehicles (ie. dodgy mortgages) that was toxic, not securitisation itself. This revisionist strand of financial history emphasises that packaged bundles of debt which steered clear of American housing performed well, particularly in Europe.
This is in large part because regulators want banks to be less risky, by increasing the ratio of equity to loans. As banks are reluctant to raise capital, they need to shed assets. This is where securitisation helps: by bundling up the loans on their books (which form part of their assets) and selling them to outside investors, such as asset managers or insurance firms, banks can both slim their balance-sheet and improve capital ratios.
Securitisation “airlifts assets off the balance-sheets of banks, freeing up capital, and drops them onto the balance-sheets of real-money investors", in [BoE] Haldane’s words. That may not seem urgent now, as Europe’s banks are flooded with cheap money from the ECB and have years before stricter capital ratios officially kick in. But at some point markets will have to take over financing banks. Such airlifts would neatly transform Europe’s inflexible bank-led system into something more akin to America’s.
Financial watchdogs believe that regulatory tweaks have made the securitisation practice safer. One improvement is that those involved in creating securitised products will have to retain some of the risk linked to the original loan, thus keeping “skin in the game”. The idea is to nip in the bud any temptation to adopt the slapdash underwriting practices that became a feature of America’s mortgage market in the run-up to the financial crisis. Another tightening of the rules makes “re-securitisations”, where income from securitised products was itself securitised, more difficult to pull off. If regulators have their way, financial Frankenstein monsters such as the “CDO-squared”—a security underpinned by a security underpinned by a security underpinned by assets—are unlikely to make a comeback.
Perhaps the biggest change, however, is in investors’ attitudes. Before 2008, many fell for the sales pitch of the whizzes who hatched CDOs, ABSs and the like. Reassured by somnolent credit-rating agencies, which backed the bankers’ vision of handsome returns at virtually no risk, investors piled in with no due diligence to speak of. Aware of the reputational risks of messing up again, they now spend more time dissecting three-letter assets than just about anything else in their portfolio. Regulators will have to make sure that they retain this newfound discipline.