First there was securitisation, then came credit derivatives. Now financial engineers have put the two together, allowing banks to securitise almost any kind of asset. But there are risks as well as opportunities, says Claire Smith.
Securitisation was once a tool for banks to take large pools of assets off their balance sheets and sell to a wide range of investors. But now individual investors with particular requirements are coming to them and asking for tailor-made securitisations. The banks, conscious of the shortfall in supply for certain market segments, in particular, money market funds, are creating structures designed around the needs of that segment. They have become engaged in a rush of creativity as they package up debt obligations into new and inventive forms from which paper can be issued.