Complex debt deals caused mayhem, but we need them

 

The “exploited and abused” practice of banks parcelling up debts to sell on to investors in the build-up to the financial crisis needs to be revived, in a more transparent form, deputy Bank of England governor Sir Jon Cunliffe said today.

The securitisation market has been all but closed since 2007 when the global financial system was first paralysed by fears over the value of “toxic” bonds based on high-risk loans and “sub-prime” entered the financial lexicon. Ratings agencies have come under huge fire since the crisis for inflating the creditworthiness of a host of securitised assets - left virtually worthless by the crash - to win business from the banks issuing the bonds.

Sir Jon said complex financial instruments should be made more transparent to revive a market badly hit by the crisis, as well as ensuring the banks retain some exposure to the loans underpinning them. He said the aim was “to develop standards so that it does what it says on the tin; but it is actually a jar. You want a label on the outside of the jar that is clear, that uses understandable terms and... you can see into the jar,” he said in a radio interview.

Sir Jon Cunliffe, left, pictured with the current Governor of the Bank of England, Mark Carney (Rex) Sir Jon Cunliffe, left, pictured with the current Governor of the Bank of England, Mark Carney (Rex)

Sir Jon’s comments come after the Bank and the European Central Bank set out proposals to resurrect the market for asset-backed securities and help the flow of credit to smaller businesses. ECB president Mario Draghi is expected to set out plans to buy up parcels of small business loans issued by banks to improve corporate credit on Thursday. 

The deputy Governor said securitisation “was exploited and abused and it spread risk throughout the system”. But he added: “We want to see if the market can develop standards and ways of doing this that actually deals with the risks that we saw crystallise - and that can enable securitisation to happen in a beneficial way. Clearly what the market has to do if we want to develop this mechanism is do so in a way that is simple, robust, transparent and investors can know and predict the risks and the payoffs of the instruments they’re buying.”

He said in an interview with BBC radio: “There is risk in lending, it is about understanding the risk, pricing and providing collateral. This is not about making lending riskless. We want to make it safe in the sense that people can understand what it is they’re doing.

Meanwhile the fall-out from the previous boom in securitisation and its subsequent collapse lingers on. Ratings agency Standard & Poor’s is fending off a $5 billion lawsuit from the US Department of Justice for fraudulently misrepresenting the ratings of mortgage-backed bonds. The agency contends that the action - first launched last year - comes in response to its controversial decision to strip the US of its triple-A credit rating in the summer of 2011. Calpers, California’s state pension fund, is also suing S&P and rival Moody’s over ratings on investments which led to $800 million in losses after the agencies failed in a bid to dismiss the suit.

Start your day with The Independent, sign up for daily news emails
News
people
News
A boy holds a chick during the Russian National Agricultural Exhibition Golden Autumn 2014 in Moscow on October 9, 2014.
news
Life and Style
love + sex
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle v United 1 player ratings
Arts and Entertainment
Victoria Wood, Kayvan Novak, Alexa Chung, Chris Moyles
tvReview: No soggy bottoms, but plenty of other baking disasters on The Great Comic Relief Bake Off
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle 0 Man United 1: Last minute strike seals precious victory
ebooks
ebooksA special investigation by Andy McSmith
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
Arts and Entertainment
Seth Rogan is one of America’s most famous pot smokers
filmAmy Pascal resigned after her personal emails were leaked following a cyber-attack sparked by the actor's film The Interview
News
Benjamin Netanyahu and his cartoon bomb – the Israeli PM shows his ‘evidence’
people
Arts and Entertainment
80s trailblazer: comedian Tracey Ullman
tv
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
The Internet of Things: Meet the British salesman who gave real-world items a virtual life

Setting in motion the Internet of Things

British salesman Kevin Ashton gave real-world items a virtual life
Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

Election 2015: A dead heat between Mr Bean and Dick Dastardly!

Lord Ashcroft reveals latest polling – and which character voters associate with each leader
Audiences queue up for 'true stories told live' as cult competition The Moth goes global

Cult competition The Moth goes global

The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

Pakistani women come out fighting

Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
Leonora Carrington transcended her stolid background to become an avant garde star

Surreal deal: Leonora Carrington

The artist transcended her stolid background to become an avant garde star
LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

Education: LGBT History Month

Pupils have been discussing topics from Sappho to same-sex marriage
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

Cricket World Cup runs riot to make the event more hit than miss...

The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot