Asset Securitization Is Alive and Well

Article excerpt

Asset Securitization Is Alive and Well

An April 1 article ["Securitization, After Fast Growth, 29% Below Last Year's First Quarter," page 1] gave an incomplete picture of bank loan securitization and could stigmatize banks that use it.

The writer cited several reasons why first-quarter securitizations fell below the year-earlier level. These include easier access to alternative markets, investor concerns over the quality of loans securitized, a reduced supply of loans available for securitization, and higher transaction costs.

Though I agree with much of the article, I have several criticisms:

* It addressed securitization only in terms of the experience of large, somewhat troubled banks that securitize via the public markets.

* It referred to securitization solely as a balance-sheet management tool used by institutions with capital adequacy problems and limited alternatives; no mention was made of securitization's value as a strategic tool.

* It suggested that if causes for the slide in issuance persist, securitization will decline as a key funding strategy.

By focusing only on large, troubled banks, the article ignored the benefits that can be realized from securitization by a large segment of your readership -- managers of healthy banks with assets in the range of $500 million to $3 billion.

The president of one of my company's clients, a well-capitalized and very profitable $1.5 billion bank holding company, recently commented to me that securitization must be viewed as a process, not an event.

It is not a one-time quick fix of a problem, he said. Rather, it is an ongoing means of responsibly meeting loan demand while capturing the fee income and ancillary business generated by such loans, and of subsequently selling the loans in a securitized form -- normally at a tidy profit.

He also recognized that securitization is valuable in managing asset allocation and liquidity.

Different Perspectives

Troubled institutions view securitization as a problem-solving event. Healthy ones treat it as an ongoing way of doing business, with multiple benefits.

The reasons the article gave for the recent decline in securitizations apply mainly to large, troubled banks and should not be regarded as leading to a shift away from securitization by the industry as a whole.

Consider the following:

* Easier access to alternative markets. It is true that larger institutions in general have gained greater access to the capital markets over the past few quarters. …