Securitization: Past, Present and Future PDF
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PALGRAVE MACMILLAN STUDIES IN BANKING AND FINANCIAL INSTITUTIONS SERIES EDITOR: PHILIP MOLYNEUX Securitization: Past, Present and Future Solomon Y Deku and Alper Kara Palgrave Macmillan Studies in Banking and Financial Institutions Series editor Philip Molyneux Bangor University Bangor, United Kingdom The Palgrave Macmillan Studies in Banking and Financial Institutions series is international in orientation and includes studies of banking sys- tems in particular countries or regions as well as contemporary themes such as Islamic Banking, Financial Exclusion, Mergers and Acquisitions, Risk Management, and IT in Banking. The books focus on research and practice and include up to date and innovative studies that cover issues which impact banking systems globally. More information about this series at http://www.springer.com/series/14678 Solomon Y Deku • Alper Kara Securitization: Past, Present and Future Solomon Y Deku Alper Kara Nottingham Trent University Loughborough University Nottingham, UK Loughborough, UK Palgrave Macmillan Studies in Banking and Financial Institutions ISBN 978-3-319-60127-4 ISBN 978-3-319-60128-1 (eBook) DOI 10.1007/978-3-319-60128-1 Library of Congress Control Number: 2017946324 © The Editor(s) (if applicable) and The Author(s) 2017 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and trans- mission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: Stéphanie Kara Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Preface This book provides an overview of the historical and recent develop- ments in the global securitization markets. It explores how and why securitization is created and examines multiple securitization instru- ments. It investigates, by reviewing the academic evidence, how securiti- zation influenced bank lending behaviour and why securitization, once acclaimed as an innovative mechanism for economy-wide efficient risk distribution, became a contributing factor to the 2007–2009 financial crisis. It also looks at the future of the securitization markets in light of the regulatory changes after the financial crisis. The book has several purposes. Firstly, it aims to explore if and how securitization changed financial intermediation and lending behaviour by reviewing the pre- and post-financial crisis theoretical and empirical literature. The book’s distinctive feature is bringing the growing post - crisis academic research to the attention of a wider audience by critically appraising the recent empirical evidence in comparison with pre-crisis arguments on securitization. Secondly, it aims to examine the interac- tion between originator banks and investors under the inherent pres- ence of information asymmetries in ABS transactions. Here the book provides fresh insights from recent academic research on whether and how banks misled investors in buying poor quality securitization securi- ties prior to the financial crisis. Thirdly, it aims to evaluate regulatory weaknesses in the years leading to the financial crisis and whether the v vi Preface new regulatory measures are impeding the desired level of activity in the securitization market. Another distinctive feature of the book is the comparison of the US and European markets throughout the text. These are the two main secu- ritization markets in the world and they display several differences in terms of structure, products, historical developments and regulation. With its thought-provoking insights, the book should prove to be of par- ticular value for students, practitioners and academics. We specifically thank Martin Scheicher and Stefanie Wehmeyer for their contribution by writing Chapter 8. We are grateful to David Marques-Ibanez, Steven Ongena, Yener Altunbaş, Philip Molyneux, Aydın Özkan, Mark Rhodes, Elvis Hernandez-Perdomo, Jingsi Leng, Alberto Franco Pozzolo, as well as to the participants of seminars held at the University of Hull and Loughborough University for very helpful comments, suggestions and support on the papers that provided origi- nal material for the various chapters of the text. Thanks are also due to Natasha Denby for editing of the manuscript and to Stéphanie Kara for providing the cover image of the book. Finally, thanks to our families and loved ones for their patience and support during the project. The views expressed in this book are the authors’ own and do not necessarily reflect those of the Nottingham Trent University and the Loughborough University. Solomon Y Deku Alper Kara Contents 1 Introduction 1 2 Mechanics of Securitization 7 3 Securitization Structures 31 4 A Historical and Regional Overview of Securitization 57 5 Effects of Securitization on Banks and the Financial System 93 6 Valuation of ABS Under Asymmetric Information 113 7 The Role of Securitization in the 2007–2009 Crisis 131 8 Securitization: Key Trends Since the Crisis 145 9 Concluding Remarks 169 Index 173 vii List of Abbreviations ABCP Asset Backed Commercial Paper ABS Asset Backed Security ABSPP ABS Purchase Program AFME Association for Financial Markets in Europe ARM Adjustable Rate Mortgage BCBS Basel Committee on Banking Supervision BoE Bank of England CBO Collateral Bond Obligation CCP Collateralized Commercial Paper CDO Collateral Debt Obligation CLO Collateral Loans Obligation CMBS Commercial Mortgage Backed Security CMO Collateralised Mortgage Obligation CMU Capital Markets Union CP Commercial Paper CPR Constant Prepayment Rate CRR Capital Requirements Regulation EBA European Banking Authority ECB European Central Bank ECBC European Covered Bond Council EIF European Investment Fund EL Expected Loss ESF European Securitisation Forum ix x List of Abbreviations EU European Union EUR Euro FCIC Financial Crisis Inquiry Commission FHA Federal Housing Administration FNMA Federal National Mortgage Association Freddie Mac Federal Home Loan Mortgage Corporation FSB Financial Stability Board GAAP Generally Accepted Accounting Principles GBP British Pound GDP Gross Domestic Product GNMA Government National Mortgage Association GSE Government Sponsored Entity HQA High Quality Assets IFRS International Financial Reporting Standards IO Interest Only IOSCO International Organization of Securities Commissions IRB Internal Rating Based LAPA Liquidity Asset Purchase Agreement LBO Leveraged Buyout LIBOR London Interbank Offer Rate LLA Liquidity Loan Agreement LTV Loan to Value MBS Mortgage Backed Security P2P Peer to peer PAC Planned Amortization Class PC Participating Certificates PD Probability of Default PSA Pooling and Servicing Agreements REMIC Real Estate Mortgage Investment Conduit RMBS Residential Mortgaged Backed Security RTC The Resolution Trust Corporation S&L Savings and Loans SEC Securities and Exchange Commission SEC-ERBA Securitisation External Ratings – Based Approach SEC-IRBA Securitisation Internal Ratings – Based Approach SEC-SA Securitisation Standardised Approach SIFMA Securities Industry and Financial Markets Association SIV Structured Investment Vehicle
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