The Sub-Prime Crisis and the Asset Backed Securitisation

It is well known that the financial turmoil of 2007-2008 had its roots in the sub-prime mortgage crisis in the United States. There are several causes which triggered the sub-prime mortgage crisis; among them, the lax lending policies and the securitization practices had a prominent role. The securitization of assets, especially, mortgage loans, is a form a financial innovation which gained popularity in the United States, beginning with the 1970s. This technique permits that homogenous packages of bank loans to be changed into securities and then to be sold to the final investors on the capital market. By securitization of loans, banks may transfer the credit risk to the final investors and, therefore, they have no incentive to make a strict assessment of the risk of insolvency. In this context, it seems that securitization of the sub-prime mortgages contributed to the deterioration of credit granting process, with dramatic consequences on the value of the mortgage-backed securities. Subsequently, these tensions spread to other international financial markets, to the entire market in asset-backed securities and other parts of the credit market.