International Law

RESTARTING SECURITIZATION MARKETS IS CRITICAL

By Karel.Frielink

IMF: securitization can positively contribute to financial stability and sustainable economic growth

Although recent public opinion has focused on what went wrong with securitization, according to the International Monetary Fund (IMF), it is important to recognize the many benefits associated with sound securitization. Mobilizing illiquid assets and transferring credit risk away from the banking system to a more diversified set of holders continues to be an important objective of securitization, and the structuring technology in which different tranches are sold to various investors is meant to help to more finely tailor the distribution of risks and returns to potential end investors (click here or here for information on securitization in the Netherlands Antilles).

In Chapter II of its Global Financial Stability Report, ‘Restarting Securitization Markets: Policy Proposals and Pitfalls‘, the IMF makes the case that restarting private-label securitization markets, especially in the United States, is critical to limiting the real sector fallout from the credit crisis amid financial sector deleveraging pressures.

According to the IMF key policies should include:

• Authorities should continue to press for the minimization of incentives and rewards for rating shopping and ratings-related regulatory arbitrage, recognizing that credit rating agencies will continue to play a key role in the securitization process
• Disclosure and transparency standards should be improved along the intermediation chain
• Securitizer compensation should be better linked to the longer-term performance of the securitized assets, and recent changes to accounting standards go a long way toward this goal
• Securitization products should be simplified and standardized to the extent possible to improve liquidity and reduce valuation challenges

This approach of the IMF seems to make sense, provided the right balance can be found between allowing financial intermediaries to benefit from securitization and protecting the financial system from instability that may arise if the origination and monitoring of loans is not based on sound principles. Instead of making a lot of noise or just increasing regulation because the public opinion so demands, regulators should actually change the rules of the game in a sane direction to reduce risks as much as possible.

Karel Frielink
Attorney (Lawyer) / Partner

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Full post as published by Karel's Legal Blog on September 22, 2009 (boomark / email).