Securitization: Is it Still Vital and Relevant for the 21st Economy?

Abstract

Securitization, important though it has been in shaping the financial system in the industrialized world, where regulatory regimes left it un-fettered contributed significantly to causing and aggravating the financial crisis. This implies that stringent streamlined regulatory and supervisory regimes that do not allow opaque transactions, enforce regular information disclosure, punish those who violate, prevent practitioners from shopping around for lax regime, impose stipulations that ensure that initiators or securitizers retain some of the risk inherent in assets they securitize, can go a long way to improve the function and obviously the use of securitization in raising finances, shifting risk to parties that have the capacity to deal with it or make use of it to generate high returns. Secondly, following from the above, securitization per se, is a good financial innovation as long as it is not used for purposes that are far removed from its essential goals. In other words, going back to basics in utilizing securitization is likely to generate a lot of rewards for the financial sector. Thirdly, establishing a repository or clearing house for securitized assets can go along way to ensure that securitized assets are marked to market, hence prices thereof reflect fair values for the money invested. If this is in place, the need of external parties such as credit rating agencies for ranks of securitized products will be minimized, relegating such scenarios of ‘doctoring’ investment grade assets out of junk chunks of toxic assets will be history as reference prices will be in place for investors to use in making investment decisions. Fourthly, It is also evident from the turmoil that surrounded the securitization industry that there was sheer luck of good valuing services of products involved in transactions as most were over the counter, and shrouded in mystery as to the methods used in constituting the components parts as was the underlying assets. The existence of valuation services can go a long way to reduce this opaqueness and has additional benefits if it is implemented in a unified way (involving various securitized products, regulators and buyers and sellers, and brokers as well as other practitioners). Fifthly, securitization is here to stay, albeit in a transformed way which will take into account the fallacies of the past that led to immense losses for individuals, corporations and economies at large. Its uses remain as vital even more desirable in post 2008 global financial crisis times given the changed nature of rules and regulations that underpin financial intermediation activities carried out by conventional financial institutions such as commercial banks, investment banks, mutual funds, and even capital markets. The role of unconventional financial services, if anything, is even more needed to not only complement financial services conventional service providers delivery, but also fill the gap left by increasing reluctance of such institutions to continue doing what they have been doing under different operating conditions that demand higher prudence, adoption of in-house customized risk management programs, and more wariness from regulators and supervisors of not letting a recurrence of events that created and accentuated the 2008 global financial crisis.