ASSESSING THE APPLICATION OF SECURITISATION IN LITHUANIA

Algirdas Miškinis,Eivilė Čipkutė

doi:10.15388/ekon.2012.0.886

Abstract

The aim of this article is to analyse the application possibilities of the securitisation mechanism in Lithuania. Securitisation has been used for a few decades by banks as an instrument to decrease credit risk and broaden the sources of funding. The increasing demand for asset-backed securities has prompted the development of this mechanism. Nevertheless, despite its benefits, if used irresponsibly, this mechanism can also create risks to financial stability. Foreign capital banks dominate in the Lithuanian banking sector, and their financing structure is highly based on parent bank loans, which is the second largest financing source after deposits. As the recent economic crises have shown, the flow of this resource is unstable and pro-cyclical. Therefore, banks ought to seek additional funding sources. The issue of securities backed by bank loans could be one of those sources. The authors of this article, with the help of regression analysis, have assessed a possible effect of additional credit flow, which could be attracted by banks using securitisation, on country’s GDP. The analysis has shown that certain types of loans can significantly impact the country’s GDP growth. The most significant effect on GDP would be reached, if banks would securitize new loans issued to households and use the obtained funds to issue more loans to households.

Highlights

The country’s economic wealth and the well-being of its population are determined by a plethora of factors, first of all by the country’s economic development level
We can see that, for example, if a commercial bank operating in Lithuania would securitize 1% of household loans provided in one quarter and would provide new household loans from the funds obtained from the assetbacked securities, the GDP of Lithuania could increase by 0.15%; if 5% of these loans would be securitized, the GDP would increase by 0.75%
We should note that in reality such result would be unlikely, since banks would not necessarily loan all new resources; besides, credit flows would depend on their demand: if the loan demand at that time would be lower, the new resources obtained through securitization would not be used

Summary

Introduction

The country’s economic wealth and the well-being of its population are determined by a plethora of factors, first of all by the country’s economic development level. There are multiple factors causing economic growth, one of the main being credit flow. Banks’ ability to ensure a sufficient amount of well diversified financial resources can ensure an adequate and stabile credit flow to the economy. One of widely used instruments to augment banks’ credit flow is securitisation – the process when illiquid bank’s assets are replaced with securities. The growth of issuance of asset-backed securities has been steady since 1995. It peaked in 2010, in the US reaching 2,75 bln. The volumes of the new issuance of asset-backed securities fell dramatically due to the financial crisis. The need of securitization in Lithuania is assessed and its benefits to the Lithuanian economy are empirically analysed

Literature review

Findings

Conclusions