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The Rise and Fall of the ABS Market

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  • Cerrato, Mario

Abstract

The nancial crisis has raised some concern about the quality of information available on some traded assets on the securities markets to market participants and regulators. Asset-backed securitization in general got partial blame for the paucity of liquidity on bank balance sheets and the consequent credit crunch. After the Asset-Backed Security (ABS) market fell to near inactivity in 2009, the US federal government's Term Asset-Backed Securities Loan Facility (TALF) provided backing and a boost to the issuance of asset-backed securitization. In this market condition, given the nature of ABS, it is di¢ cult for them not to be relatively illiquid, and this has resulted in unacceptable levels of market risk for most investors. Their liquidity before the crisis was driven by a market in continuous expansion, fed by Special Purpose Vehicle (SPV), Conduits, and other low capitalized term-transformation vehicles. Nowadays, the industry is concerned with the ongoing ABS reforms and how these will be implemented. This article reviews the ABS market in the last decade and the possible consequences of the recent regulatory proposals. It proposes a retention policy and the institution of a new nancial body to supervise the quality of the security in an ABS pool, its liquidity, and the model risk implied by the issuer's valuation model.

Suggested Citation

  • Cerrato, Mario, 2010. "The Rise and Fall of the ABS Market," SIRE Discussion Papers 2010-105, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:234
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    File URL: http://hdl.handle.net/10943/234
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    References listed on IDEAS

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    1. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
    2. Mitchell, Janet & Fender, Ingo, 2009. "Incentives and Tranche Retention in Securitisation: A Screening Model," CEPR Discussion Papers 7483, C.E.P.R. Discussion Papers.
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    More about this item

    Keywords

    Asset Backed Security; Government Policy and Regulation;

    JEL classification:

    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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