Restarting Securitization Markets: Policy Proposals and Pitfalls
T he opening chapter of this Global Financial Stability Report makes the case that restarting private-label securitiza-tion markets, especially in the United States, is critical to limiting the real sector fallout from the credit crisis amid financial sector deleveraging pressures (see Box 2.1). 1 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. However, this " originate-and-distribute " secu-1 Private-label securitization products comprise those not issued or backed by governments and their agencies , that is, excluding those of government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac in the United States), and public sector entities (such as Canada Mortgage and Housing Corporation in Canada). ritization model failed to adequately redistribute credit risks, in part due to misdirected incentives. Hence, it is important in restarting securitization to strike the right balance 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. Ultimately, the value of securitized products relies on the quality of underlying assets. Meanwhile, with most of these markets effectively shut down, some central banks and governments have taken up the slack, with various asset purchase and liquidity support programs effectively becoming investors of last resort of securitized instruments. Smaller nonbank lenders have been particularly hard hit, as they do not have central bank support or low-cost deposit funding to fill the void left by the securi-tization market shutdown. While central bank and government support alleviated private-label securitization market funding pressures, anecdotal evidence suggests that they may have also slowed the market's This chapter tracks the rise and fall of securitization markets, and evaluates the various initiatives aimed at restarting them on a sounder footing, focus-ing on the markets for securities not backed by governments or government-sponsored enterprises. The analysis attempts to discern how securitization can positively contribute to financial stability and sustainable economic growth. While most of the current proposals are unambiguously positive for securitiza-tion markets and financial stability, some proposals—such as those designed to improve the alignment of securitizer and investor interests and accounting changes that will result …