Structured Finance Market to Re-emerge in Different Form
Despite the collapse and discrediting of the structured finance market, CreditSights believes its importance to credit creation will ensure an eventual recovery, albeit in a substantially different form.
In Strategy Outlook: Structured Finance Part 1, CreditSights says the market has all but shut down owing to the collapse in real estate prices, the credit crisis and the resulting economic downturn. “Investor confidence in complex structures which suffer from too little liquidity, too little information and too little alignment of incentives for issuers and investors, has been decimated”
Despite the evident shortcomings of many of the structures that are currently inflicting losses on balance sheets across the globe, the tailoring of, and the dispersion of, risk that securitization offers is so key to the credit creation process that we believe its resurgence, in a different form, is guaranteed.
“We believe securitization is a key means of providing liquidity to the banking system and as such it will reemerge in the coming months. The final form that newly securitized structures will take is uncertain but there are characteristics that will be inherent in any reformation – transparent reporting and pricing, aligned incentives that are legally enforceable, and structural resilience.”
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