The development of securitization techniques
Securitization is a financing technique, designed by financial engineering . It consists of the transformation of assets into marketable securities which are then sold to investors.
The purpose of securitization is in particular to transform loans, generally medium or long term, into market products, the market having to provide liquidity to this product.
These techniques were first developed in the United States, it is the ” securitization ” of real estate claims in the 1960s. Securitization first allowed the refinancing of mortgage loans.
Securitization is part of balance sheet management techniques in the category of asset management techniques. Its purpose and consequence is to transfer the risk from the holder of the receivables to the financial markets. It is no longer just a matter of a circulation of claims, but of a dissemination of claims. Markets must make securitized assets liquid.
The credit risk that were reserved to banks before deregulation can then be transferred to investors who choose to be exposed to this risk.
In the second half of the 1970s the euphoria of petrodollars had developed and financial experts considered that there was a problem of excess liquidity.
The lending policy was particularly open and this in fact resulted in over-indebtedness of the developing countries. The defaults noted raised the problem of the recognition of debts in the balance sheets of American banks. It was then that techniques were developed for transferring assets and improving these assets, particularly in the context of securitization.
In addition to the US from the 1970s, securitization has developed to boost the financing of residential real estate ,. The first players were the federal agency “Governmental National Mortgage Association” or “Ginnie Mae”, the Federal National Mortgage Association (FNMA) or ” Fannie Mae ” and the “Home Loan” or ” Freddie Mac “. These federal government sponsored agencies were responsible for acquiring mortgage loans from institutions that had granted mortgage loans.
Securitization has also developed in England and France where it was introduced into the legislative provision by the law of 23 December 1988 in the form of mutual funds of claims (FCC) . .
Securitization has developed on the basis of the confidence placed in the assessment of risks made by financial rating agencies, which gave very solid ratings to securities resulting from arrangements, in particular on the basis of the ratings they gave to securities. credit enhancers.
The securitization market
Securitization is the vector of credit marketization which is supposed to improve the efficiency of the financial system by disseminating risk.
The development of securitization has been particularly rapid. The outstanding amount of MBS / CMOs and bond ABS reached 10,000 billion dollars in the United States at the end of 2007. This is a threefold increase in ten years. The securitization market represents 40% of the bond market, while that of corporate bonds represents $ 5,800 billion and that of the US Treasury $ 4,500 billion
In Europe, ABS issues reached € 100 billion compared to € 238 billion in the United States over the same period
A significant portion of buyers of securitization products has been made up of hedge funds , seeking high returns, as well as investment banks.
The nature of securitization
Securitization is a creation relating to financial engineering and balance sheet management.
Its purpose is to remove risky financial assets from the balance sheet. In the United States, the FASB 140 rule authorizes the off-balance sheet in securitization transactions.
Securitization corresponds to securitization . It consists of making a pool of financial assets and issuing securities representing these assets. It is a technique of financing companies by the financial markets.
It is based on the transfer of receivables or financial assets held by the ceding company. It is accompanied by the use of various techniques intended to ensure valuation on the secondary market, with massive use of techniques qualified as credit enhancement, single-line insurance or CDS in particular, and the use of ratings.
Securitization is in fact the privatization of the creation of money. This, apart from metallic money, is in fact created by loans granted by private institutions. Banks create money by granting loans; these loans are for the most part transferred outside the banking system. Securitization makes it possible to mobilize the liquidity present on the international capital markets.
The crisis has shown that these markets do not provide the necessary liquidity in the event of a downturn in the underlying markets .
The market had been used as a criterion for valuing assets on the basis of this liquidity assumption. This is the marked to market rule . When the assumption of liquidity is denied, quite naturally this accounting rule inherent in the presentation of the market made to investors has a procyclical effect.
Through the derivatives that accompanied the securitization, the market has swelled astronomically. It is clear that not all global assets are sufficient to deal with a massive derivative default. Investors will face the fact that the protection derivatives were meant to offer them is worthless.
Debt mutual funds
In France, it was the subject of the law of December 23, 1988, with its implementing decree of March 9, 1989, codified in articles L. 214-43 et seq . of the Monetary and Financial Code, with the particular aim of improving the capital ratios of credit institutions in the context of credit disintermediation.
Mechanisms of securitization
The mechanisms of securitization involve three phases. A pool of assets is transferred to a securitization vehicle which issues negotiable securities to represent the assets. The purchase of the securities issued allows the financing of the company or the bank which had the assets.
The logic of securitization
The logic of securitization is a logic of financing and balance sheet management
Securitization and credit risk
Securitization is a credit risk management technique whose virtue is supposed to be to reduce the risk by its dissemination
The dangers of securitization
The dangers of securitization are in particular the loss of traceability and the difficulties in assessing the risk for the investor who will acquire the securities, but also the risks resulting from the use of leverage and the reconcentration of risk. in banks financing the purchase of securities