We have also seen that they can create moral hazard in lending activity, for example the “originate to distribute” model in the US. And of course, the asset class was one of the triggers of the financial turmoil that began in the US in 2007–08.
There, as summarised by Brunnermeier (2009) and others2, the rise in poorly-understood and improperly-structured securitised products led to a sharp inflow of funding, fuelling a credit bubble amid a reduction in lending standards, and in turn further poor-quality securitisation. However, we should not over-react: misuse of mortgage-based ABSs in the US for example does not mean that all such products are inherently dangerous.