Global Financial Crises and the Future of Securitization
Autor: Tim • November 12, 2017 • 905 Words (4 Pages) • 871 Views
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Covered bond which is defined as long-term debt securities that are secured by specific assets of the issuer of the bonds. It can be used as a financing method instead of securitization. The main difference between covered bonds and securitization lies in their recourse. While securitization is non-recourse, covered bonds have dual recourse. If the cover-pool assets are insufficient, then covered bondholders have a recourse claim against issuer which is pari passu with unsecured creditor claims. (Makrevska,E.2013) Covered bonds is much more secure than securitization to investors.
Conclusion:
The process of securitization has brought many benefits to originators and issuers such as introducing a new cheaper source of financing, improving the liquidity of the portfolio, transferring credit risks as well as interest rate risks. However, it was turned out to be the main attributor to the subprime mortgage crisis in US which illustrated some flaws. This process encouraged risky behaviors which made the overall financial system suffer a lot and it is still in a lack of regulations.
According to this, in the future the securitization process is recommended to be based on simple products, improving the regulation standards on credit rating and improving the requirements of credit enhancement when running the securitization process. High efficiency and high transparency are needed to structure the securitization process in the future. The majority of investors will be back to the securitization market on condition that securitized products are well regulated, the credit ratings are reliable, the securities are backed by high quality mortgages and risks are controlled appropriately.
Reference:
Makrevska,E.(2013).THE NEW IMPROVED PROCESS OF SECURITIZATION, Journal of Economics and Business.
Schwarcz,S.L.,(2010).THE FUTURE OF SECURITIZATION. Retrieved from: http://ssrn.com/abstract_id=1300928; Understanding the Subprime Financial Crisis, 60 S. C. L. REV. 549 (2009).
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