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
PROMOTED VIDEO
News
ebooksNow available in paperback
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: Marketing Services Manager - (communications, testing, DM)

£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

Guru Careers: Finance Account Manager

£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Day In a Page

Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas
La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

Deaf community outraged by La Famille Bélier

The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
10 best high-end laptops

10 best high-end laptops

From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
Susie Wolff: A driving force in battle for equality behind the wheel

Susie Wolff: A driving force in battle for equality behind the wheel

The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

'No abs Adam' plans to muscle in on Usain Bolt's turf

After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum