Securitisation revisited : a post-crisis analysis of selected legal issues

Abstract

In recent years, securitisation has captured the attention of many keen eyes, including those of lawmakers, practitioners and students in legal, economic, and financial circles, due to the notoriety it gained as a result of its contribution to the vicious cycle of systemically risky banking and investment practices that led to the global financial crisis. As securitisation volumes grew larger and more complex in the world’s largest financial centres during pre-crisis years, they became challenging for regulators to supervise and at times too sophisticated even for highly qualified investors to comprehend, leading to a crisis of complexity. Today, despite the increased awareness of the existence of securitisation, this financial tool still suffers from a general lack of understanding and misconceptions, particularly with respect to its mechanics. This problem can be further highlighted in civil law jurisdictions, such as Malta amongst others, where long-standing traditional civil law principles have had to be modified to encourage securitisation transactions, and where common law concepts linked to securitisation as a result of its Anglo-Saxon origins cannot always be easily transcribed to civilist systems. Through its recent proposal for a dedicated Securitisation Regulation, the European Commission seeks to foster an understanding of how illiquid financial assets can be safely transformed into an alternative and viable source of funding to encourage business growth, and in turn, it is hoped, support the continued recovery of the European economy. However, it is important that post-crisis high level reviews of securitisation laws do not ignore having due regard to reinforcing the governance mechanisms in the internal structures of securitisation transactions. If securitisations are forecast to constitute such a vital component of the wider economy in the not distant future, then even if securitisations are not usually intended for retail investors, ensuring that securitisations are soundly structured from the inside out could be indispensable to avoid a repetition of the largescale defaults that led to the materialisation of systemic failures whose consequences direly affected the entire interconnected global economy.