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Towards a resilient securitization framework for the post-crisis era Oscar Arce Research and Statistics, Director Comisi PowerPoint Presentation
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Workshop on Securitisation , OECD - Banco de España Madrid 27-28 May 2010. Towards a resilient securitization framework for the post-crisis era Oscar Arce Research and Statistics, Director Comisión Nacional del Mercado de Valores. Focus & Outline of the talk. Where do we come from?

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Workshop on Securitisation, OECD - Banco de EspañaMadrid 27-28 May 2010

Towards a resilient securitization framework for the post-crisis eraOscar ArceResearch and Statistics, DirectorComisión Nacional del Mercado de Valores

focus outline of the talk
Focus & Outline of the talk
  • Where do we come from?
          • The macrofinancial environment of the securitisation boom
        • What went wrong?
          • Vulnerabilities in the global risk transfer framework
          • Some lessons for the future
        • Building up a resilient framework for securitisation
          • The current regulatory initiatives
the environment of the securitisation boom
The environment of the securitisation boom
  • A macrofinancial perspective on the origin of the boom:

Global current account imbalances

Source: IMF

  • Global imbalances (plus demographic factors) caused a global “savings glut”
  • Much pressure from the demand for assets (specially, high-quality) on their supply
  • A potential problem of assets scarcity…….. [Back]
the environment of the securitisation boom1
The environment of the securitisation boom
  • ….that was largely resolved through the massive growth of securitisation

Global issuance of AAA-rated long-term fixed income assets (1990-2009)

Source: Dealogic

  • The rapid global growth in AAA-assets (from 20% of total assets in 1990 to 60% in 2003) was largely due to securitisation
the environment of the securitisation boom2
The environment of the securitisation boom
  • Indeed, securitisation was an extremely productive technology of AAA-securities

Global issuance of long-term fixed income assets (1990-2009)

Source: Dealogic

Average proportion of AAA-assets: corporate (9%), sovereign (48%), securitisation (75%)

what went wrong
What went wrong?
  • The collapse of the US subprime market was sufficient to trigger a global debacle in securitisation markets…

Dynamic distribution of the stocks of ABS according to Moody’s ratings


Source: European Securitization Forum

  • ….with sharp falls in prices, vanishing private demand and secondary markets drought
lessons from the crisis
Lessons from the crisis
  • Some lessons from this episode include:
          • CRAs ratings overestimated real risks (bad models, bad calibration, failures in tranching, misperceptions on correlations, etc.)
          • ABS complex structures gave rise to multiple problems of incentives and conflicting interests (between originators/investors, within CRAs, etc.)
          • Buoyant demand conditions allowed for successful trading of very opaque products (squared-CDO, re-securitisations, etc.) of more than dubious social added value
          • Bottom line: the mechanism for massive risk transfer through securitisation contained important deficiencies
lessons from the crisis1
Lessons from the crisis
  • Other lessons (equally important but less obvious):
          • The global high quality-asset scarcity problem is likely to persist for some time [Figure 1]
          • At the present, public debt fills the gap, but (hopefully) this trend will reverse as the world economy recovers.
          • Moreover, robust recovery will only take place is the transfer of private risks (i.e. credit) recovers
          • Securitisation is a key tool for transferring and managing private risk, with unique advantages:

- Liquidity transformation

- Asset-liability maturity alignment

- Risk management/diversification

building up a resilient framework for securitisation
Building up a resilient framework for securitisation
  • Putting things together: In principle, there are incentives for the revival of both the supply and the demand sides of the market
  • A complex task for both regulators and the industry: to set up a framework that brings demand and supply together and to do it in a swiftly and sustainable manner, avoiding the mistakes of the past
  • Two main areas for regulatory action:
          • Incentives
          • Transparency
1 incentives alignment
1. Incentives alignment
  • Minimum retention rules (supported by G20, followed by 5%-rules by EU, US Government):
          • Likely to induce a more diligent attitude by originators and remove incentives for the revival of the “originate-to-distribute” model.
          • In the EU the restriction is implemented through a ban on the credit institutions’ portfolios of securitisations (CRD III). Thus, a symmetric measure is needed on other potential holders of securitisations (pension funds, investment funds, etc.) to avoid regulatory arbitrage.
          • More generally, the implementation of retention rules should be flexible enough to avoid undue distortions. In particular:
  • Different classes ABS have different risk profiles which change over time
  • The mapping between retention rules and incentives for responsible origination is largely imperfect
1 incentives alignment1
1. Incentives alignment

Source: IMF Source: CNMV

2 transparency
2. Transparency
  • The sudden collapse of worldwide ABS markets in 2007 reflects a lack of confidence i.e. information on these products (this applies to investors, CRA’s, insurers, supervisors and, even, originators).
  • Some recent initiatives try to fill this gap:
    • IOSCO (ABS Disclosure Principles, April 2010) provides set of standards on the information to be included in public offerings and listings of ABS, including:
      • identity, functions and responsibilities of the intervening parts;
      • main characteristics of the pool of assets (legal nature of the asset, rate of return, average life, delinquency and loss information, etc.);
      • structure of the transaction (flow of funds, distribution frequency and cash maintenance, fees and expenses, prepayment considerations, etc.);
      • credit enhancements;
      • use of derivatives (interest rate and currency swaps, etc.)
      • markets (secondary market venues in which the ABS can be traded, etc.)
  • Some central bank recent initiatives to implement very demanding disclosure regimes on loan-level information (ECB, BoE, in the context of their collateral framework)
2 transparency1
2. Transparency
  • Also some national supervisory authorities have insisted upon this theme (like the recent US SEC proposal)….

…..and the pioneering regulation by CNMV (Circular 02/2009), that includes new homogeneous industry-wide public periodic disclosure requirements on:

    • Accounting items: flow of funds, balance-sheet, profits and losses according to the IFRS;
    • Disaggregated data on the pool of assets: number and type of assets, average life, prepayment rate, loan-to-value, degree of concentration (sectorial, geographical and by type of debtor)
    • Funds liabilities: structure and cost of funding, changes in ratings, etc.
    • Credit enhancements, including a dynamic track system
  • From January 2010, some of this information is sent monthly, some half-yearly, to the supervisor by the Securitisation Funds Managers.
2 transparency2
2. Transparency
  • Liquidity in secondary markets has plunged during the crisis (RMBS trading in Europe has fallen by 45% during the crisis)
  • Although there are no large-scale problems on market microstructure, there is high potential to increase post-transparency (i.e. public disclosures on transactions) with direct benefits on:
      • more efficient price formation (price discovery)
      • higher liquidity
      • wider investor base beside hold-to-maturity buyers
  • Both CESR (2009) and IOSCO (2009) have launched a set of recommendations in this area.
  • In the EU, some possible venues for future action include:
      • a common (or reasonable similar) regime for the main organised markets;
      • the establishment of one or several platforms to receive and disseminate post-trade information (like US TRACE system).
2 transparency3
2. Transparency
  • There are important positive synergies between transparency and simplification and standardisation measures.
  • Simplification:
      • shorter securitisation chains tend to be more transparent robust in face of incentive problems;
      • too complex structures (squared-CDO) have shown very opaque, fragile and with little social added value, so recent Basel II revision is welcome;
  • Standardisation:
      • comparison of information across different ABS is only meaningful if there is a minimum degree of standardisation;
      • transparent and liquid secondary markets require some form of asset homogenisation;
      • the industry must play a leading role in this field.