Securitization will increasingly be used as an economic capital and risk management tool, predicted Himesh Shah, director at Credit Suisse First Boston in London who focuses on non-flow transactions for financial institutions. "Until recently the view was widely held that securitization had little to do with real risk management, but that is no longer valid today," said Shah.
The technology can be used to manage credit risk rather than operational or market risk, including concentration risk, pro-cyclicality risk and margin compression risk. Securitization will be especially useful in managing the risks associated with portfolios of loans to lower quality large corporates and loans to smaller corporates, which can be quite costly for financial institutions to hold on balance-sheet.
The key drivers behind this shift in the use of securitization include the implementation of Basel II, which will force greater alignment of regulatory and economic capital requirements, and International Accounting Standard 39, which sets risk transfer as a prerequisite for the deconsolidation of assets.
