The economics of securitisation: benefits and some drawbacks  The role of securitisation in the financial markets of developed economies has expanded dramatically in recent years. Following a relatively slow start compared with the US market, the European market for asset-backed securities grew very rapidly in the past few years as entrepreneurs, bankers and investors increasingly warmed up to the advantages of instruments that allowed them to issue bonds backed by the cash flows from pools of asset classes as diverse as music royalties from rock stars, rental income from pubs, and soccer 2 club ticket sales, as well as more boring stuff such as credit card debt and mortgage loans. Also some European governments were quick to spot the attractiveness from new financial instruments that enabled them to raise funds from the securitisation of future government revenues – whether from the expected sales of real estate holdings and lottery tickets or from pension contribution claims – rather than from more traditional mechanisms of financing public spending that are usually not very popular with voters. There is no sector though more closely involved in securitisation than the banking sector. In fact, asset securitisation was introduced in the 1970s in the US precisely for the purpose to allow depository institutions to sell their pools of mortgage loans before maturity, thereby acquiring an additional source of funding.
First, being capital costly, the ability to sustain a given level of credit supply with a lower volume of capital enables the banking sector to reduce the costs of financing for borrowers and favours financial development, which is ultimately associated with economic growth. Moreover, securitisation may be seen as representing a step towards more complete credit markets, thereby contributing to enhancing the efficiency of the economic system. 3  See ECB (2007), Structural Issues Report on “Corporate finance in the euro area”, May. 4  Funding liquidity refers to the ability of a bank to: (1) convert its assets into cash by disposing of them or borrowing against their value in order to meet expected and unexpected obligations, or (2) to issue liabilities in order to raise funds. 5  According to some tentative empirical evidence, increasing securitisation may diminish the impact of monetary policy impulses on banks’ loans supply via the so-called “bank lending channel”, although the effect of securitisation seems to depend on the economic cycle and bank risk (see Altunbas, Y., Gambacorta, L. and D. Marqués Ibáñez (2007), “Securitisation and the bank lending channel”, ECB Working Paper 838. 2  BIS Review 68/2008  In addition, the securitisation of loans in principle could reduce a secular source of vulnerability of the economies, by taking risk concentrations associated with loan portfolios away from the balance sheets of the banking sector and spreading them more broadly across other sectors.