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Robert K. Steel
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In a speech this week to the American Securitization Forum, US Treasury Under Secretary Robert Steel came out in favour of securitization as a vehicle for risk mitigation. But he added that participants in these markets must take the blame for misuse of these instruments and the resulting sub-prime crisis.
Steel said that there were significant benefits in securitization which enabled investors to improve their risk management, achieve better risk adjusted returns and access more liquidity. But he also said that there were also examples of inappropriate behaviour, including fraudulent or criminal activity, and that this would result in increased regulation in the future such as licensing standards for mortgage originators. In order that this market continued there would also have to be improvement to many of its components such as the involvement of the rating agencies, the processes of mortgage origination, and the securitization and onward selling of these investment instruments.
However, at that same conference, a panel of participants said that the market for structured investment vehicles (SIVs), the wrapper for securitized loans, was effectively dead due to the impact of the changes that Basel II would bring about. Whilst the market crisis has seen these SIVs unable to fund themselves, the fact that Basel II will bring them into the calculations of overall capital requirements now makes them less attractive investment vehicles for banks which would also now have to pay very high rates to sell them to investors.
Reuters reported Dominic Swan, a panellist at the conference and a managing director at HSBC Bank, as saying that banks will find it more efficient to hold highly-rated assets on their own balance sheets under Basel II, and that HSBC would be leaving the SIV market.
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