The latest issue of the International Monetary Fund’s Finance & Development includes a useful primer on securitization, tracing its origins and growth.
The subprime mortgage crisis that began in 2007 has given the decades-old concept of securitization a bad name, IMF Economist Andreas Jobst writes. Securitization is the process in which certain types of assets are pooled so that they can be repackaged into interest-bearing securities.
The landscape of securitization has changed dramatically in the last decade, Jobst notes. “No longer is it wed to traditional assets with specific terms such as mortgages, bank loans, or consumer loans (called self-liquidating assets). Improved modeling and risk quantification as well as greater data availability have encouraged issuers to consider a wider variety of asset types, including home equity loans, lease receivables, and small business loans, to name a few.”
Although most issuance is concentrated in mature markets, securitization has also registered significant growth in emerging markets, where large and highly rated corporate entities and banks have used securitization to turn future cash flow from hard-currency export receivables or remittances into current cash.
In the future, securitized products are likely to become simpler.
After years of posting virtually no capital reserves against highly rated securitized debt, issuers will soon be faced with regulatory changes that will require higher capital charges and more comprehensive valuation, Jobst concludes.
“Reviving securitization transactions and restoring investor confidence might also require issuers to retain interest in the performance of securitized assets at each level of seniority, not just the junior tranche.”