Breaking the Ice: Using Transparency to Thaw the Securitization Market

February 2011
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Breaking the Ice: Using Transparency to Thaw the Securitization Market

At a glance

Market conditions and demand, legislative reform, and innovation allowed the securitization industry to evolve from its infancy into a mainstay of the financial markets in less than three decades.

Market conditions and demand, legislative reform, and innovation allowed the securitization industry to evolve from its infancy into a mainstay of the financial markets in less than three decades. As investor acceptance increased, the markets continued to grow and innovate. However, at times innovation came at the cost of decreased transparency, perceived declines in quality, and increased risk. The combined effects of weakening credit assessments and a downturn in the housing market and global economy led to a dramatic decrease in new securitization transactions. Although securitization is expected to maintain its key role in global capital markets, the market continues to face challenges as it recovers.

Restoring confidence in the securitization market requires a focus on several core principles:

  • Rebuild investor confidence through transparency, expanded disclosures, and enhanced quality of information.
  • Enhance accountability for all market participants (borrowers, issuers, investors) through robust underwriting, appropriate representation and warranties for compliance with the document terms, and effective governance and oversight of the process.
  • Implement cost-effective oversight to improve accountability in and oversight of the markets.
  • Properly align and balance the risks, rewards, and costs of securitization among all participants.
  • Improve reporting and disclosure requirements by ensuring the financial reporting and disclosure models meet the needs of investors, regulators, and other stakeholders.
  • Re-examine regulatory capital rules to ensure that they strike the right balance for on- or off-balance sheet securitizations, are implemented consistently across the globe, and do not disincentivize the process.