[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.]


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....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."


[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!]




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