Economic Commentary: Securitisation – new initiatives and challenges

Date 19/12/2014

Since the financial crisis, the market for bonds created by securitisation has been small. Several initiatives have therefore been taken in Europe to strengthen the market over the last year. Several institutions and central banks have published discussion papers containing proposals on how the market could be developed, primarily with the motivation of making it easier for small and medium-sized companies to obtain funding.

In addition, new regulations have been presented that may increase the incentives for banks to securitise their assets. For example, these regulations involve encouraging the banks to make more use of equity in their funding and to make their loan-based funding more long-term.

Securitisation involves converting illiquid loans into bonds. This takes place through the sale of the loans from a bank's balance sheet to a so-called special purpose entity that issues bonds to fund the purchase of the loans.

Securitised bonds played a key role in the financial crisis. This was because the problems that mainly arose in the United States were largely due to a lack of transparency surrounding securitised bonds. In the United States and some parts of Europe, securitisation is significantly more common than in Sweden. If securitisation were to become more common in Sweden, this could, in turn, lead to structural changes to the Swedish financial system, which could, in turn, place new demands on banks, investors and authorities.

By Elin Eliasson and Anders Rydén
The authors work in the Financial Stability Department of the Riksbank.