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Monday, June 30, 2014

'How Securitization Really Works'

I didn't realize the share of the securitization market that is government-backed was so high. This is from Cecchetti & Schoenholtz:

How securitization really works: ... The success of U.S. securitization – as an alternative to bank finance – is a key factor behind the current push of euro-area authorities to increase securitization. ... Because finance is predominantly bank based in Europe – and banks faced heightened capital requirements – governments and potential borrowers are anxious to shift at least some financing into capital markets (including bonds and equities). ...
Yet, emulating American securitization ... probably means providing government guarantees at a scale that people currently do not envision. ...
To see what we mean, we can look at a few numbers regarding U.S. securitization. According to the Federal Reserve’s flow of funds statistics (the Z.1 release), total securitization stood at $9,360.4 billion as of end-March 2014... But government-backed securitizations – these are mortgages, student loans and the like – accounted for $7,721 billion of this total... That is, only 18% of U.S. securitization – primarily auto loans and credit card debt – are free from government guarantees! Even at the peak of private-sector securitization in mid-2007 ... the government-backed share exceeded 60%. ...
To put these numbers into perspective, we can look at another part of the U.S. financial system: insured bank deposits. You may be surprised to learn that ... only ... 61% of bank deposits are government backed ... versus 82% of securitizations. ...
We believe that U.S. government backing of securitizations can (and should) be scaled back... Nevertheless, it also seems difficult to jumpstart a large-scale securitization market in Europe without sizable public support. ...
The bottom line: If the euro area wishes to get securitization going in a big way, it will still need more of the mutual insurance among nations that has been so difficult to achieve. That doesn’t seem to be in the cards for now.

    Posted by on Monday, June 30, 2014 at 10:22 AM in Economics, Financial System | Permalink  Comments (12)

          


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