Renewed Securitization Momentum: Brazil and China

Some interesting and possibly very positive securitization related news out of two large BRIC markets last week.  Both Brazil and China market leaders are recognizing the need to restore or expand the use of structured finance to meet the needs of their local capital markets.

In China last week, local news agencies were reporting that a joint notice issued late last month by the People’s Bank of China, Ministry of Finance and China Banking Regulatory Commission calls for the restoration of Credit Asset Securitization Pilot Programs which will once again allow banks to issue asset-backed securities.  Originally authorized by the central authorities in the middle of the last decade, the authorities suspended the program in 2008, during the height of the credit crisis.  Now, it appears that authorities are recognizing the need to add another valuable tool for banks to utilize when managing their balance sheets.  This program is expected to allow the banks to create a better balance between their short and long-term liabilities by transferring some of the risk to other parties.  Another important feature of the program will be allowing non-banking institutions to invest in these securities, thereby transferring some of the risk to parties outside the banking sector.

On the Brazilian front, Fitch Ratings issued a report describing the rapidly declining abilities of the Brazilian banking sector to support the borrowing needs of the rapidly growing residential mortgage market.  They predict that mortgage lending (demand) could outstrip banking deposits (supply) by as soon as 2013.  If that is accurate, one would think that there must be a strong and rapid response by the securitization markets to fill the expected gap between supply and demand.  The securitization of residential mortgages is not new to the Brazilian market.  Authorizing legislation dates back as far as 1997.  It would seem that Fitch is expecting the market to dust off some of this framework and will be putting it to work very shortly.

The overriding observation, not to be missed in both of these cases, is the micro-economic example that both economies provide for observers in the most historically developed securitization markets; the US and Europe.  A healthy global securitization market is essential to a sustainable global market recovery.

About markferraris
Managing Principal Orchard Street Partners LLC

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