Securitisation is a policy response to the credit crisis but predicated upon open stress testing
Friday, 15 May 2009 | 
Finance - Banki...
In a recent blog post;
European Parliament debate on CAD3 -The Future of Securitisation
We at Asymptotix stuck our neck out and said that between the lines.
“ ….. clearly the argument about whether securitisation activity should be legislated out of existence or not, has been settled at a policy level both in the [European] parliament and the Commission. This is the first hint of more policy (and consequent enabling legislation) to come in that space, possibly including enabling legislation, similar to the CDS market initiative; clearly the Commission (and the parliament) have fully realised that Europe is dead without a wholesale Credit Market, i.e. a market in Structured Products but what we are going to see is a European ‘joined up’ market subsuming the unique German Pfandbreife process into common standards of supervision, transparency and market operation in Europe for Structured Products and Wholesale Credit Markets.”
This morning, I attended the Brussels Economic Forum (organised by the European Commission, DG ECFIN). Jose Vinals gave the keynote speech; he is Director, Monetary and Capital Markets at the IMF; he was appointed at the end of March this year, having been Deputy Governor at the Bank of Spain since July 2006, he holds a PhD. in economics from Harvard. He knows a thing or two about what he is talking about!
In a wide ranging speech deconstructing the policy of the IMF to banking supervision going forward Vinals made one key point (among many), which is that of a three pillar policy response of the IMF to the crisis, pillar one for the IMF is the policy question, how can Securitisation Markets be restarted, how quickly and in what manner can they be made transparent and amenable to supervision?
He continued in the Q&A that he sees Stress Testing as an aspect of Transparency and Supervision but a pointless exercise if not Open and explicable, he pointed out that Governments conducting Stress Testing in a closed (‘private language’) fashion are positioned in exactly the same hateful place as the Ratings Agencies! Stress Tests as a purely political exercise are counter-productive. 
He argued that "we need to know that we know" that Stress testing is Open and that techniques are common. This Openness is the second pillar of the IMF policy response to the crisis, Disclosure. As Jose Vinals argued in conclusion (and as asymptoix has argued repeatedly for months) “financial innovation is GOOD!” We need to scrutinize Financial Innovation in an Open fashion, we need to scrutinize and explain the concept of triple-A, we need to blow away the smoke and mirrors with Openness!
This logic takes us to another neck-out recent post by Asymptotix:
Is the European Union legislating the Ratings process towards an Open Source Model?
& provides, not only the answer yes but also the context why!
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Securitization is not that evil after all
by Ugo Albertazzi, Ginette Eramo, Leonardo Gambacorta and Carmelo Salleo
Abstract:
A growing number of studies on the US subprime market indicate that, due to asymmetric information, credit risk transfer activities have perverse effects on banks' lending standards. We investigate a large part of the market for securitized assets ("prime mortgages") in Italy, a country with a regulatory framework analogous to the one prevalent in Europe. Information on over a million mortgages consists of loan-level variables, characteristics of the originating bank and, most importantly, contractual features of the securitization deal, including the seniority structure of the ABSs issued by the Special Purpose Vehicle and the amount retained by the originator. We borrow a robust way to test for the effects of asymmetric information from the empirical contract theory literature (Chiappori and Salanié, 2000). Overall, our evidence suggests that banks can effectively counter the negative effects of asymmetric information in the securitization market by selling less opaque loans, using signaling devices (i.e. retaining a share of the equity tranche of the ABSs issued by the SPV) and building up a reputation for not undermining their own lending standards.
BIS
Extracting information from structured credit markets
Comment on Analytic Bridge
The Rise and Fall of the ABS Market
University of Glasgow and Structured Credit Investors
November 5, 2010
Abstract
The fi?nancial crisis has raised some concern about the quality of information available on some traded assets on the securities markets to market participants and regulators. Asset-backed securitization in general got partial blame for the paucity of liquidity on bank balance sheets and the consequent credit crunch. After the Asset-Backed Security (ABS) market fell to near inactivity in 2009, the US federal government?s Term Asset-Backed Securities Loan Facility (TALF) provided backing and a boost to the issuance of asset-backed securitization. In this market condition,given the nature of ABS, it is difficult for them not to be relatively illiquid, and this has resulted in unacceptable levels of market risk for most investors. Their liquidity before the crisis was driven by a market in continuous expansion, fed by Special Purpose Vehicle (SPV), Conduits, and other low capitalized term-transformation vehicles. Nowadays, the industry is concerned with the ongoing ABS reforms and how these will be implemented. This article reviews the ABS market in the last decade and the possible consequences of the recent regulatory proposals. It proposes a retention policy and the institution of a new ?nancial body to supervise the quality of the security in an ABS pool, its liquidity, and the model risk implied by the issuer?s valuation model.
Link to the Paper
Moving towards an "Open Source" philosophy in Finance?
I am just re-posting my blog post from last summer about the sense I got from meetings in the EU here in Brussels that the inevitability of the general direction of discussions of Ratings and Valuation techniques, either for IFRS, Basel or Solvency; was an Open Source approach, given the transparency requirement. This general direction of travel seems to be leading to an endgame somewhere in the Open Source space this year also. I agree its painfully slow ....
Legislating The Ratings Process Towards An Open Source Model
A New Methodology to Price Structured Products
from my Analytic Bridge blog; the methodological "Pandora's Box'
http://www.analyticbridge.com/profiles/blogs/a-loan-portfolio-model-subject
SHADOW BANKING, FINANCING MARKETS AND FINANCIAL STABILITY
Remarks by PAUL TUCKER
DEPUTY GOVERNOR, FINANCIAL STABILITY,BANK OF ENGLAND
SHADOW BANKING, FINANCING MARKETS AND FINANCIAL STABILITY
at a BGC Partners Seminar, London21 January 2010
This evening I am going to focus on one part of the 'structure' debate: shadow banking. It has become commonplace that shadow banking somehow exacerbated the boom, and complicated the rescue efforts of the authorities during the bust.1 That is true. But there has been relatively little discussion about what this means for policy.
http://www.bankofengland.co.uk/publications/speeches/2010/speech420.pdf
Industry recognises restarting securitisation is crucial
Industry recognises restarting securitisation crucial to global economy
from Gillian Tett via Market Pipeline
http://marketpipeline.blogspot.com/2009/07/industry-recognises-restartin...