Securitisation has become one of the scapegoats of the crisis, but is this justified? This was one of the questions at a recent symposium on the past and future of universal banking.

On Wednesday 25 March 2009, historians, economists and sociologists met at Paris Ouest Nanterre university for the 7th daylong symposium of the doctoral school for economy, organisations, society on the history, economy and the sociology of banks and the banking system. The theme for the day was the past and future of universal banking, with a session on feedback on the crisis, including a debate on the role of securitisation in the crisis.

Securitisation is an innovation from the 1970s. Previously, loans remained on banks balance sheets until their maturity, and were used to finance shareholders’ funds, bond loans and deposits.

Securitisation allowed banks to isolate loan portfolios and transfer revenue flows and risk to investors by transforming these receivables, via an ad hoc company, into financial securities (hence the name securitisation.) As a result, the banks continue to receive the present value, minus the risk.
Basically, securitisation was a relatively ordinary technique that was useful for economic development.

However, the pre-crisis climate had the following impacts on the development of securitisation:
• Amplification
• Complexity
• Opacity
• Poor risk assessment

Securitisation’s role in the current crisis is very much related to this last point. Just like in insurance, underestimating risk can result in a delicate financial situation, with investors seeing the value of the securities they have purchased disappear. And risks were definitely underestimated in this current crisis. Because property loans were secured by a mortgage, and it was popularly believed that property values would never fall, the risk was incorrectly assessed as being almost inexistent. In additions, there were few incentives to assess risk properly, and risk managers often adopted a light touch.

Securitisation is not the main cause of the crisis, but it nevertheless played a role.

As regards the future, renewed consumer and business financing presupposes the restoration of specialised financing circuits and a return to securitisation, but in more secure conditions in terms of regulation and supervision. The Financial Services Authority (FSA) in the UK has already broached this issue in the Turner Review – a regulatory response to the global banking crisis.