Credit Securitisations and Derivatives: Challenges for the Global Markets

2

Developments in Structured Finance Markets

Sebastian Löhr

University of Hannover

2.1 IMPAIRMENTS OF ASSET-BACKED SECURITIES AND OUTSTANDING RATINGS

In 2010 the number of impaired Asset-backed Securities (ABS) fell for the first time in five years to 8, 071 from 14, 242 in 2009 (Moody’s, 2011). By contrast, there were only 106 ABS impairments reported for 2006 which was several months before the Global Financial Crisis (GFC) began in June 2007.1

Before analyzing the impairments by year, as well as further market developments, the major ABS structures and their functionality are briefly discussed: the US Securities and Exchange Commission (SEC, 2004) defines ABS as financial securities “that are backed by a discrete pool of self-liquidating financial assets.” The SEC (2004) further defines asset-backed securitization in its regulation rules as

“a financing technique in which financial assets […] are pooled and converted into instruments that may be offered and sold in the capital markets. In a basic securitization structure, an entity, often a financial institution and commonly known as a ‘sponsor’ originates or otherwise acquires a pool of financial assets, such as mortgage loans […]. It then sells the financial assets […] to a specially created investment vehicle that issues […] asset-backed securities. Payment on the asset-backed securities depends primarily on the cash flows generated by the assets in the underlying pool and other rights designed to assure timely payment, ...