Asia Securitisation Growth On Track In Long Term

Source : The Business Times, April 25, 2008

But sector needs to tackle origination, credit ratings, market pricing

SECURITISATION activity in Asia should grow in the medium to long term, even if the current credit crunch causes a pause or slowdown, Monetary Authority of Singapore (MAS) deputy managing director Ong Chong Tee said yesterday.

But the financial sector will need to tackle the three key areas of origination, credit ratings and market pricing if investor faith and long-term viability are to be restored.

Speaking at the second annual structured credit conference, Mr Ong said that Asia has largely been spared the worst of the credit storm, although liquidity has tightened and spreads have widened. 'Perhaps the fact that Asia is still largely centred on traditional bank intermediation, and that Asia is a relatively late entrant in the securitisation market, are a blessing in disguise,' he said.

The crisis has delivered some hard lessons, Mr Ong said. 'I think it is necessary to distinguish the 'tool' from the 'greed and deed' of market excesses.' Securitisation helps to repackage smaller loans into larger parcels and distribute them to investors, he said. This helps to spread risks and provide cheap capital. But the crisis has revealed some deficiencies.

One is origination standards. The business model of originators is to 'warehouse' loans for a period, then securitise them into the capital market, earning a fee in the process. 'Their revenue and bonuses are tied to the volume of loans they securitise, and not the repayment of these loans,' said Mr Ong. 'Thus there may not be the incentive to implement and monitor tight underwriting standards.'

The second issue is the role of credit rating agencies. While investors have noted the risk of conflict of interest when rating agencies receive fees from originators, investors are also partly at fault, he said. 'Many have chosen to over-rely on, or some may say, misuse credit ratings to justify their investment decisions. Credit ratings are measures of default risk. But investors have extended them to be indicators of market or even liquidity risk.' In extreme situations, AAA-rated securities may exhibit the illiquidity and price volatility of lower-rated securities.

The third issue is the assumption that market prices are a good gauge of an asset's value. Market pricing can be severely distorted, especially for complicated structures, Mr Ong said. 'There is a necessary simplification of products going forward. Furthermore, investors have come to realise that market pricing can be driven by a myriad of factors that are not linked to the intrinsic quality of the security.'

On the future of securitisation, he expects to see a greater proportion of deals in local currency, partly because Asian currency products are gaining favour.