Academic journal article Journal of Financial Management & Analysis

Perspectives on the Securitization of Assets: Spanish Economy in Perspective*

Academic journal article Journal of Financial Management & Analysis

Perspectives on the Securitization of Assets: Spanish Economy in Perspective*

Article excerpt


There is no doubt that securitization can be considered as one of the principal causes of the current financial crisis, which began in 2007 and shows no reliable signs of ending, in Spain. It is no coincidence that the first symptoms of the bursting of the property bubble - the crashing in July ofthat year of two hedge funds that specialised in mortgages of Bear Stearns - were closely associated with the phenomenon of securitization. The drop in rating suffered by the triple A tranches of those securitizations, whose underlying assets were sub-prime mortgages, made their quoted prices extremely volatile.

Pre-existing factors, such as excessive indebtedness, the demonstrated interconnection of the capital markets and the systemic risk entailed by that have propitiated the crisis (Losada)1. In addition, the myopia associated with short-termism in the expectation of results, incorrectly-assigned credit ratings, and the lax approach of the supervisors are other factors to consider. Lastly, the paradigm on which securitization has been based (originate in order to distribute, instead of originate in order to hold, as stated by Roldan2) has acted as a catalyzer in bringing about the expansion of a crisis whose effects have still not come fully to light today, nor been fully quantified. This is demonstrated by the open debate taking place about how to control the risk of those entities that the markets, rightly or wrongly, now consider too big to fail. Figure 1 is illustrative of the systemic risk referred to.

The Bank of Spain3 has upheld a criterion of maximum prudence in its regulation, and has demanded, among other requirements, anti-cyclical provisions in boom times, and prohibited off-balance sheet securitizations. In addition, the financial entities have maintained an almost zero exposure to sub-prime assets, and the regulator has submitted them to close supervision. But, despite this, our country has in no way escaped unscathed from the international penalization of the market for securitization bonds that, as will be confirmed later, has resulted in a practically total drought of new issues. And so a financial tool that, in other circumstances, had been demonstrated to be extremely useful in the expansion of the banking business, was suddenly revealed to be a dangerous weapon for the transmission of credit risk whose power, given the globalization of financial markets, turned out to be lethal.

Recent Evolution

At the beginning of the 1970s, the first securitizations based on residential mortgages appeared in the U.S.A. These are known as MBS or mortgagebacked securities, and this type of instrument evolved into extremely sophisticated financial structures that few, apart from a very small elite, understood very well. The securitization of credits had become, in few years, an operation taken as a reference in international financing for stimulating growth unrestricted by any risk that might be inherent in such instruments.

Starting from relatively simple products that replicated the income flows from the underlying mortgages on which they were based (known as pass-through securities) up to the complex derivative instruments in which only risk is transferred (synthetic securitization) and others that transform previous securitizations into a new instrument (collateralized-debt obligations or CDOs), the development of securitization could well be described as vertiginous. Because of the huge amount of assets thus transformed, the wide range of types of underlying credit, the variety of different instruments or securities that have come to be traded, the so-called financial engineering utilised, and the apparently unstoppable international growth in its use, securitization is one of the most prominent financial phenomena of our times. Securitization began in the U.K. in 1987 and in France in 1989, and reached Spain in the early 1990s. Although it is true that previous attempts had been made by some banking entities to issue securitization bonds (Barranechea, Gonzalez and Trujillo4), Spain lacked a specific legal framework to serve as an umbrella for the correct development and operation of this market. …

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