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INHERENT RISKS OF SECURITISATION
[We
have included this shortened version from
the main article in order to ensure that
those who like us found the naturally
lengthy complex material
hard-going and more than enough in its entirety.]
For full article :http://www.vinodkothari.com/seccont.htm
....securitisation on financial systems may
well differ between countries because of
differences in the structure of financial
systems or because of differences in the way
in which monetary policy is executed. In
addition, the effects will vary depending
upon the stage of development of
securitisation in a particular country. The
net effect may be potentially beneficial or
harmful, but a number of concerns are
highlighted below that may in certain
circumstances more than offset the benefits.
Several of these concerns are not
principally supervisory in nature, but they
are referred to here because they may
influence monetary authorities' policy on
the development of securitisation markets.
While asset
transfers and securitisation can improve the
efficiency of the financial system and
increase credit availability by offering
borrowers direct access to end-investors,
the process may on the other hand lead to
some diminution in the importance of banks
in the financial intermediation process. In
the sense that securitisation could reduce
the proportion of financial assets and
liabilities held by banks, this could render
more difficult the execution of monetary
policy in countries where central banks
operate through variable minimum reserve
requirements. A decline in the importance of
banks could also weaken the relationship
between lenders and borrowers, particularly
in countries where banks are predominant in
the economy.
One of the
benefits of securitisation, namely the
transformation of illiquid loans into liquid
securities, may lead to an increase in the
volatility of asset values, although credit
enhancements could lessen this effect.
Moreover, the volatility could be enhanced
by events extraneous to variations in the
credit standing of the borrower. A
preponderance of assets with readily
ascertainable market values could even, in
certain circumstances, promote a liquidation
as opposed to going-concern concept for
valuing banks.
Moreover,
the securitisation process might lead to
some pressure on the profitability of banks
if non-bank financial institutions exempt
from capital requirements were to gain a
competitive advantage in investment in
securitised assets.
Although
securitisation can have the advantage of
enabling lending to take place beyond the
constraints of the capital base of the
banking system, the process could lead to a
decline in the total capital employed in the
banking system, thereby increasing the
financial fragility of the financial system
as a whole, both nationally and
internationally. With a substantial capital
base, credit losses can be absorbed by the
banking system. But the smaller that capital
base is, the more the losses must be shared
by others. This concern applies, not
necessarily in all countries, but especially
in those countries where banks have
traditionally been the dominant financial
intermediaries.
The funny piece
below seeks to capture the inherent risks of
securitisation:
10 reasons
as to why the Titanic was actually a securitisation
instrument:
1) The downside
was not immediately apparent.
2) It went
underwater rapidly despite assurances it was
unsinkable.
3) Only a few
wealthy people got out in time.
4) The structure
appeared iron-clad.
5) Nobody really
understood the risk.
6) The disaster
happened overnight London time.
7) Nobody spent any
time monitoring the risk.
8) People spent a
lot trying to lift it out of the water.
9) People who
actually made money were not in original deal.
10) Despite the
disaster, people still went on other ships.
The above
highlights the risks inherent in securitisation. One
of the biggest inherent threat in securitisation
deals is that the market participants have
necessarily believed securitised instruments to be
safe, while in reality, many of them represent poor
credit risks or doubtful receivables. For example, a
growing section of securitisation market is
sub-prime auto loans and home equity loans.
Similarly, many of the health-care receivables or
student loan receivables may not represent good
credits.
One instance of a
failure in securitisation deals in the USA is the
securitisation of health care receivables by a
company called Towers Financial. Its Chairman was
later sentenced to 20 years in prison for fraud. In
fact, the first bank to securitize credit-card
payments--RepublicBank Delaware, in 1987--failed in
1988, and the Federal Deposit Insurance Corp. paid
off investors early.
In an article
titled On the Frontiers of Creative Finance: How
Wall Street can Securitise Anything [Fortune,
April 28, 1997] Kim Clark noted:
" Investors do need
to beware, of course. Financial markets are
notorious for pushing investment ideas into the
absurd. Some of these exotic securities will
undoubtedly collapse, which will undoubtedly cause a
backlash."
[DON'T WE KNOW?]
[We noticed the term SPV - Special Purpose
Company. We have our own alternative SPIV -Special
Purpose Insolvent Instrument . I'm sure many
have come across the well-known expression SPIV--living
from shady dealings!]
http://www.prisonplanet.com/what-does-the-financial-reform-bill-do-other-than-being-completely-and-utterly-worthless.html
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