First, some core buyers of senior tranches (structured investment vehicles, Canadian non-bank asset-backed commercial paper (ABCP), balance sheets of large banks) will not return. This alone will shrink the market substantially. Some of this shortfall in financing capacity will be replaced over time with on-balance sheet credit risk, though the prospect of leverage ratios will limit future buying by banks of senior tranches.
Second, the crisis laid bare important structural deficiencies, such as the woefully inadequate disclosure on securitized products. Transparency should be improved so that risk can be identified more effectively and priced more efficiently. For example, the Bank of Canada used its collateral policy to improve the disclosure of bank-sponsored ABCP, creating a standard that should become commonplace.