Financial Regulation in Crisis?

Financial Regulation in Crisis?

The Role of Law and the Failure of Northern Rock

Elgar Financial Law series

Edited by Joanna Gray and Orkun Akseli

The depositor run on the Northern Rock bank in September 2007, which led to the bank’s subsequent nationalisation was the first run on a UK bank for nearly 150 years and was a seminal moment in the unfolding global financial crisis. This book provides a detailed legal analysis of the role played by financial law and regulation during this event, and the impact the episode made on the law. The contributors to the book explore and elaborate upon the legal technique of securitisation, and how Northern Rock itself created and employed securitised financial assets. There is also in-depth discussion and analysis of the origin of the problems experienced in the wholesale interbank markets surrounding the Northern Rock crisis.

Chapter 1: Was Securitisation the Culprit? Explanation of Legal Processes Behind Creation of Mortgage-backed Sub-prime Securities

Orkun Akseli

Subjects: economics and finance, financial economics and regulation, law - academic, european law, finance and banking law

Extract

1. Was securitisation the culprit? Explanation of legal processes behind creation of mortgagebacked sub-prime securities Orkun Akseli INTRODUCTION The recent global credit crisis, the collapse of large investment and high street banks as well as the nationalisation of Northern Rock have established that misuse of innovative financing techniques such as securitisation might pose an unacceptable level of risk for the global economy. The question is whether securitisation is the underlying causal element of the global credit crisis. Securitisation as a financing technique has had a bad press of late.1 It has been seen as the culprit in the 2007/2008 financial crisis. The complex nature of securitisation and other structured finance transactions needs to be understood, along with the fact that that their failure may lead to the Risk Originator’s failure.2 Thus, securitisation should be used extensively to finance businesses but with caution by people who are aware of the consequences and complexities inherent in this type of financing. The aim of this chapter is to assess whether securitisation is in fact the reason for the financial crisis. The chapter analyses the significance of securitisation as a financing technique which is critical for raising capital. The recurrent theme is that there is a need for greater transparency and predictability in securitisation. It was the lack of transparency and ambiguous pricing of the sub-prime element of securitised credit risk that caused the crisis in interbank markets. International harmonisation activities on secured transactions may provide assistance for what would have been needed for...

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