SECURITISATION AND FINANCIAL STABILITY

English Version

There are two pieces of received wisdom concerning securitisation – one old and one new. The old view (prevalent before outbreak of the credit crisis of 2007/8) emphasised the positive role played by securitisation in dispersing credit risk, thereby enhancing the resilience of the financial system to defaults by borrowers. The subsequent credit crisis has somewhat tarnished this positive image. In its place, there is a new received wisdom which emphasises the distorted incentives that developed at all stages of the securitisation process, and which allowed the hot potato of bad loans to pass through the financial system to be held finally in the hands of unsuspecting final investors.

Although both views of securitisation (old and new, positive and negative) are appealing at a superficial level, they both neglect the endogeneity of credit supply. Financial intermediaries manage their balance sheets actively in response to shifts in measured risks. The supply of credit is the outcome of such decisions, and depends sensitively on key attributes of intermediaries balance sheets.

Three attributes merit special mention – equity, leverage and funding source. The equity of a financial intermediary is its risk capital that can absorb potential losses. Leverage is the ratio of total assets to equity and is a reflection of the constraints placed on the financial intermediary by its creditors on the level of exposure for each dollar of its equity. Finally, the funding source matters for the total credit supplied by the financial intermediary sector as a whole to the ultimate borrowers.

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