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date: 13 November 2019

Abstract and Keywords

Securitization, a structured process involving the transformation of illiquid assets into marketable securities, experienced an exponential growth in the 1990s and early 2000s. After a prolonged period of rapid expansion, securitization markets froze in 2008, as investors lost confidence in structured products. This chapter charts the rise and fall of securitization and attempts to map the future of the market by identifying the key issues that need to be addressed: (i) alignment of incentives; (ii) reduction of complexity; (iii) increase in transparency; and (iv) improvements in the use of credit ratings. Despite its controversial role during the financial crisis, the economic importance of securitization is undeniable. Several policy interventions at the national and international levels have recently been enacted to accelerate the recovery of the market by promoting simple, transparent, and comparable (STC) securitization, as there is an emerging consensus that the benefits of high quality securitization outweigh the costs and that this technique can play a key role in fostering economic recovery and growth.

Keywords: credit enhancements, financial crisis, retained interests, risk-taking, securitization, structured products

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