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.

News
people'It can last and it's terrifying'
Sport
Radamel Falcao
footballManchester United agree loan deal for Monaco striker Falcao
Sport
Louis van Gaal, Radamel Falcao, Arturo Vidal, Mats Hummels and Javier Hernandez
footballFalcao, Hernandez, Welbeck and every deal live as it happens
Sport
footballFeaturing Bart Simpson
PROMOTED VIDEO
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
News
i100
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
Arts and Entertainment
booksNovelist takes aim at Orwell's rules for writing plain English
News
ebooksAn unforgettable anthology of contemporary reportage
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

Head of IT (Windows, Server, VMware, SAN, Fidessa, Equities)

£85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...

Technical Software Consultant (Excel, VBA, SQL, JAVA, Oracle)

£40000 - £50000 per annum: Harrington Starr: You will not be expected to hav...

SQL DBA/Developer

£500 per day: Harrington Starr: SQL DBA/Developer SQL, C#, VBA, Data Warehousi...

.NET Developer

£650 per day: Harrington Starr: .NET Developer C#, Win Forms, WPF, WCF, MVVM,...

Day In a Page

Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
Fashion walks away from the celebrity runway show

Fashion walks away from the celebrity runway show

As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

Meet the stars of TV's Wolf Hall...

... and it's not the cast of the Tudor trilogy
Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

Europe's biggest steampunk convention

Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
Don't swallow the tripe – a user's guide to weasel words

Don't swallow the tripe – a user's guide to weasel words

Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

Daddy, who was Richard Attenborough?

The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor