Securitisation, Transparency and Failure Risk

Abstract

Banks and other financial companies use securitisation to redistribute risk and increase liquidity by pooling and selling assets. This paper reviews the typical set-up of a securitisation and its potential benefits and risks, including the tendency to concentrate risk in positions retained by the sponsor. The paper illustrates how the accounting for these transactions facilitates this risk concentration and impedes transparency. It discusses some academic evidence on securitisations and the role these complex transactions played in the recent financial crisis and in Ireland’s banking sector afterwards.