Is the repackaging of loans really to blame for the financial crisis?

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Securitisation, the ‘repackaging’ of bank loans, was heavily regulated after the global financial crisis, because of the blames placed on it. But was that justified? In his PhD-research, Ahmed Arif, European Doctorate in Law and Economics, found no evidence for this blame. He defences his thesis on Monday 11 December.

Securitisation is the bundling of bank loans to create tradeable bonds. An issuer creates a financial instrument by combining other financial assets and then marketing different parts of the repackaged instruments to investors. Mortgage-backed securities are a perfect example of securitization. During 2008, a lot of major financial institutions got into big trouble because of these products. Three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at low prices to other banks (Bear Stearns and Merrill Lynch).

Securitisation was heavily regulated after the global financial crisis of 2007-2008, because of the blames placed on it. However, a favourable treatment was given to covered bonds - close counterparts of securitised products. This discrimination raised many concerns among the market participants once the dust of the crisis was settled.


The study of Ahmed Arif provides a comparative analysis of securitised products and covered bonds. He reviewed the regulations and assessed the credibility of the blames placed on securitised products to identify the actual problems in this market. His empirical analysis also assessed if covered bonds can help in avoiding the problems linked with the securitisation. Arif collected data from seven major European markets for period of 2000-2014.

Is securitisation to blame?

The major blame on securitisation is that it motivates banks to take elevated credit risk. However, the empirical results of the study do not support this blame. Covered bond issuing banks are also found taking a higher risk in the long run. Moreover, the empirical analysis also shows that securitisation per se does not increase risk in the banking system, but it depends on the volume of issued securities.

A non-linear (U-Shaped) relationship is found between securitisation volume and systemic risk. Results also suggest that only bigger banks should be allowed to issue covered bonds.

Currently, regulations are trying to control the risk and restart the securitisation market at the same time. Based on empirical findings, the study of Arif suggests that flat treatment given to securitisation may not help in meeting these goals. However, incremental regulations might help regulators to achieve above mentioned competing goals.

Ahmed Arif, European Doctorate in Law and Economics (EDLE): Deciphering Securitisation and Covered Bonds: Economic Analysis and Regulations

About Ahmed Arif

Ahmed Arif studied Finance at both the National University of Modern Languages in Islamabad and at Shaheed Zulfikar Ali Bhutto Institute of Science and Technology in Karachi (Pakistan). He started his PhD-research at Erasmus School of Law in 2015. Arif has been a PhD-fellow at University of Bologna since 2014.

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