Securitization: The Transformation of Illiquid Financial Assets into Liquid Capital Market Securities Examples from the European Market

Abstract

Since the benefits a firm can derive from securitization are universal, the discussion of a market bounded by national borders is somewhat artificial unless the focus is on constraints particular to the country which promote or inhibit the use of securitization. With the exception of the United Kingdom, regulatory constraints have been an important factor in slowing the development of a European market for asset and mortgage backed securities. In addition to the regulatory hurdles, securitization in Europe has been inhibited by segmented corporate bond markets and the relatively slow development of money market savings vehicles for households. Liquidity across credit spectrums has been enhanced since the introduction of the Euro, as has been the competition for savings. European companies are developing the ability to securitize even if the technique is not yet being widely exploited. What is the European market for mortgage and asset backed securities? Does it include the U.S. credit card banks, Citicorp, Chase, MBNA, and First USA that have refinanced U.S. credit card receivables in European currencies and in Euro? Does it include GMAC which has structured Swiss Franc and Euro ABS backed by its U.S. dealer floor plan loans? Does it include Japanese banks that have refinanced Yen denominated leases with Euro and Swiss Franc ABS? Does it include Barclays' issue of $1 billion of ABS backed by sterling credit card receivables? Of course the answer is yes. Markets are defined by both the supply and demand sides. Our analysis focuses on the supply side of the domestic European market.

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“…However, EU law (Articles 87 and 88 of the EC treaty) prohibits state aid in the form of guarantees as this may distort competition in the mortgage markets (Coles & Hardt, ). Furthermore, the growth of European securitization was largely inhibited by regulatory constraints (Stone & Zissu, )…”

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“…However, EU law (Articles 87 and 88 of the EC treaty) prohibits state aid in the form of guarantees as this may distort competition in the mortgage markets (Coles & Hardt, 2000). Furthermore, the growth of European securitization was largely inhibited by regulatory constraints (Stone & Zissu, 2000). 1 The outstanding growth of the European mortgage securitization markets has been attributed to increased institutional demand, technological and financial innovation, and the introduction of the Euro (Altunbas, Gambacorta, & Marques-Ibanez, 2009).…”

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“…Gorton and Pennacchi (1995) provide an economic rationale for bank loan sales and securitization. See also Stone and Zissu (2000). part of the consequences (losses) if the securitized assets do not perform.…”