In the event, of course, the bursting of the housing bubble helped trigger the most severe financial crisis since the Great Depression. It did so because, unlike the earlier decline in equity prices, it interacted with critical vulnerabilities in the financial system and in government regulation that allowed what were initially moderate aggregate losses to subprime mortgage holders to cascade through the financial system.
In this regard I believe the approach recently developed by EIOPA, and partly inspired by the Eurosystem eligibility framework, has many merits, not least being relatively simple while managing to exclude many particularly-risky ABSs. Having defined criteria for so-called “high-quality securitisation”, the next step is deciding what treatment to grant. There is more room to manoeuvre than is generally recognised.