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12 October, 2009:

American Securitization Forum’s (ASF) Executive Director, George P. Miller, delivered testimony on 7th October, 2009 at a hearing of the Senate Banking, Housing and Urban Affairs Subcommittee on Securities, Insurance and Investment on “Securitization of Assets: Problems and Solutions.” 

Miller’s testimony sung paeans about the relevance of securitization, and lamented that since the mayhem in the financial markets, securitization has remained dormant. Lots of people have held securitization responsible for the subprime debacle, but according to Miller, the deficiencies are not inbuilt in securitization but the manner in which securitization was used by the market participants that led to the rigmarole. High leveraging caused significant increase in the demand much of which was artificial and not guided by the financing needs of the lenders and the borrowing needs of the consumer.

Miller also suggests that the policy reforms coupled with industry initiatives may help in reviving the securitization market, for a more stable environment these reforms should be coupled with integrity and reliability of securitization data and transaction structures coupled with enhanced operational risk. The reforms that Miller suggested are as below:

  • Increased Data Transparency, Disclosure and Standardization, and Improvements to the Securitization Infrastructure – ASF’s project on Residential Securitization Transparency and Reporting (“Project RESTART”) focuses on addressing the transparency and standardization deficiencies in the RMBS markets initially.
  • Required Risk Retention and Other Incentive Alignment Mechanisms – ASF supports the idea of risk retention as a means of aligning of the economic incentives of the transaction participants. However he does not rule out the possibility of having other forms of achieving effective means of alignment of interest of the transacting parties.
  • Increased Regulatory Capital Requirements and Limitations on Off-Balance Sheet Accounting – ASF believes that increase in the regulatory capital requirements should be introduced for certain securitization. Overall increase in the regulatory capital requirement may have a negative effect on the economic viability of securitization itself.
  • Credit Rating Agency Reforms – Credit rating agencies play a very important role in the securitization market and the reforms suggested to increase the quality, accuracy and integrity of credit ratings and the transparency of the ratings process are all welcomed. ASF supports the reforms for full and transparent disclosure on the basis for structure finance ratings so that the risk of securitization can be understood and differentiated from the risk presented by other types of credit instruments.

[Reported by: Nidhi Bothra]