Basel and IOSCO have laid out principles for simple, transparent and comparable (STC) ABS in hopes that better issuer and investor understanding of the secondary market will facilitate investor interest and, thus, promote loan origination in sectors suitable for securitization. The goal is to use ABS to permit banks to play their traditional origination role without requiring them to hold large amounts of capital because assets stay on their balance sheets; if loans are securitized and then held by non-bank investors like pension funds and insurance companies, the thinking is that credit availability will then rise, loan cost will decline, and bank capitalization will rise without suppressing credit. Absent criteria for sound ABS, increased securitization could, regulators fear, not only increase bank risk, but also transfer risk from regulated firms to those with less capital resilience and/or to retail investors taking significant risks with retirement or other critical funds.
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