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The Bank of Finland has added a new publication entitled Securitisation to its Series A. The work was written by Katja Taipalus, Kari Korhonen and Pertti Pylkkönen who all work at the Bank of Finland Financial Markets Department. The aim of the publication is to increase awareness on the concept of securitisation, which has rapidly become common in international financial markets, and to review the prerequisites of securitisation in Finland.
Securitisation refers to the conversion of illiquid assets in banks’, insurance companies’ or other companies’ balance sheets into form that can be traded to investors. A typical example of a balance sheet item that can be securitised is housing loans. Banks in particular have become active securitisers but many other companies too have securitised such assets as their accounts receivable. The selling price of securitised items is based on the present value of their future cash flows. In turn, the right to these cash flows is transferred to the investor. Hence securitisation can be seen as a form of financing. In addition, the risk related to the future cash flows is transferred partially or entirely from the seller of securitised assets to the investor. Consequently, securitisation is also a tool for risk management. From the investors’ point of view, securitisation offers new investment opportunities. However, besides great benefits, securitisation, similarly to derivatives, entails a significant danger of misuse. Sometimes securitisation would appear to have had an alternative motive – the evasion of restrictions imposed by regulation.
The publication sheds light on various aspects of securitisation, which has gained ground rapidly and received a lot of attention in the United States, Asia and Europe. The publication describes the basics of securitisation and the main differences between the various types of securitisation. Furthermore, it assesses the impact of securitisation on the availability of financing and on the financial markets in general. The publication also aims at evaluating the potential problems related to securitisation. In the same vein, it evaluates securitisation in Finland, possible obstacles to the process in our country, and presents a review of opinions of Finnish banks and investors. To sustain competition, Finnish market participants and authorities should keep up to date on the special features of securitisation, as this activity with its different variations seems to become ever more common in international financial markets.
The authorities are taking an increasing interest in securitisation, as it has led to the restructuring of financial markets and introduced new methods of managing and redistributing risk. From a central bank perspective, it would be beneficial to assess the impact of securitisation on the transmission of monetary policy, in particular, and the opportunities for the development of collateral practises.
An assessment of the current regulation on securitisation and the need for development in this area are also presented in the publication. The regulations on capital adequacy requirements for banks are currently being updated, and the new requirements will probably also see the introduction of provisions on securitised items. The publication assesses the likely impact of the new capital adequacy requirements on areas such as the securitisation of banks’ assets.