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Prof. Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.

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Securitization risks

The risks of securitization are seen as follows: – the originating bank has little or no concern for the careful selection and monitoring of debtors; – demand for securitization paper can suddenly dry up, as was observed in the subprime crisis and the financial crisis that followed it, where an unexpected synchronization of defaults on the reference assets in the portfolio led to a market collapse; – if securitization paper is issued via special purpose vehicles in offshore financial centers, there is no supervision of the transactions, not to mention any equity backing; – if an originator assumes the obligation to include a special purpose vehicle in its balance sheet in the event of difficulties, this can lead to the originating bank itself being caught up in the maelstrom, as was observed several times in connection with the subprime crisis; – if, as happened in the course of the subprime crisis, there is a sudden drop in the price of securitized securities, even top-quality securities come under general suspicion; banks have had to take large write-downs as a result, and this at a time when insolvent special purpose vehicles are weighing on earnings; and – last but not least, it is ultimately impossible to assess the quality of securitization papers that have grown out of a pool of often tens of thousands of individual receivables; this applies to all tranches. – See Absence Capitalism, Claw-back Clause, Defeasance, Diamond Thesis, International Business Company, Moral Hazard, Securitization Papers, Securitization Structure. – Cf. ECB Monthly Bulletin, February 2008, p. 89 ff. (explanation of individual risk factors).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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