THE ECONOMICS OF SECURITIZATION: EVIDENCE FROM THE EUROPEAN MARKETS

Securitization is the process whereby financial assets are pooled together, with their cash flows, and sold to a specially created third party that has borrowed money to finance the purchase. The borrowed funds are raised through the sale of securities, in the form of debt instruments, into the market. Securitization is thus a technique used to transform illiquid assets into securities. Securitization creates value by increasing liquidity and funding, reducing the cost of funding, allowing originators to reach a funding sources diversification, improving originators’ risk management, increasing the segmentation between the origination and investment functions, and allowing originators to benefit from regulatory (and/or tax) arbitrage and to improve key financial ratios. Although the economic advantages, securitization also has problems, especially when used inappropriately. Considering the important role played by securitization in the development and propagation of the 2007/2008 financial crisis, the most commonly referred problems of securitization are complexity, off-balance sheet treatment, asymmetric information problems, agency problems, and higher transaction costs. Besides describing the economic motivations and problems of securitization, this paper provides details on asset securitization characteristics and players, presents the recent trends of securitization markets, describes the role played by securitization in the 2007/2008 financial crisis, and provides some statistics of asset securitization activity in Western Europe between 2000 and 2013.


Introduction
The global development of the corporate sector has been demanding the creation of new vehicles for fundraising. Professionalization and the growing sophistication of capital markets, as well as increasing access to international markets, require less risky securities and internationally standardized warrantees. Therefore, analysis has been increasingly focused on a risk assessment process based on asset segregation and asset pooling, rather than on a company or a group of companies looking for financing. For many countries, this has required adjustments to be made to their financial system, towards new forms of financing, in which the role of securitization transactions has gained increasing relevance.
Securitization means a process by which an entity pools together its interest in identifiable future cash flows, transfers the claims on those future cash flows to another entity that is specifically created for the sole purpose of holding those financial claims, and then issue negotiable securities to be placed into the market. Thus, the aim of securitization is to transform illiquid assets into securities suitable for trade.
The interest of studying securitization is also justified by its dramatic increase in the last decade and by recent events in financial markets. The financial turmoil started in the third quarter of 2007 and continued through to 2008, leading to concerns about the exposure of financial institutions to the most risky segments of the US mortgage marketsthe so-called subprime mortgage marketand related financial instruments. The resulting financial market tensions caused investors and regulators to be concerned about (and even doubt) the impact of some types of securitization transactions on financial stability during times of stress, and the ability of different securitization products to spread shocks across different capital segments. As a result, there is an increased need to understand what securitization transactions are, the motivations behind them, their benefits, features and even their problems.
To understand why securitization matters, we are taken back to the Modigliani and Miller (1958) capital structure irrelevance theorem, which holds that capital structure is irrelevant to firm value. In a Modigliani and Miller world, securitization transactions would not exist, as they would offer no advantages over less costly alternatives. However, considering that debt and equity of any firm effectively represent asset-backed securities, the irrelevance proposition can play a fundamental role within a securitization framework. In a world of perfect and liquid financial markets, where asymmetric information is not an issue, tranching or the act of encapsulating an initiative or a pool of assets in an ad hoc organization would not add value and firm's financing structure would be irrelevant. Thus, the existence of market imperfections (at least asymmetric information, market incompleteness, and market segmentation) can explain tranching, 'off-balance sheet financing' and the benefits of securitization instruments.
Consequently, securitization may matter, because it creates value by minimizing the net costs associated with the stated market imperfections.
Despite the previously mentioned economic benefits for sponsors and investors, securitization transactions also have disadvantages, especially when used inappropriately. One can identify the following problems related to the use of securitization: (i) complexity; (ii) offbalance sheet treatment; (iii) asymmetric information problems; (iv) agency problems; and (v) higher transaction costs. Besides the fact that securitization instruments are complex vis-a-vis straight debt finance transactions or products, two major problems are commonly pointed out, underlying the roots of the 2007/2008 financial crisis: (i) asymmetric information problems; and (ii) agency problems. The increased complexity of structured products related to securitizationlike CDOs, squared CDOs, and even more complex securitiesdestroyed information, thereby making asymmetric information worse in the financial system and increasing the severity of adverse selection and moral hazard problems. The originate-to-distribute business model, which lay behind the subprime mortgage market, was subject to the principal-agent problem, because (i) the mortgage originator had little incentive to make sure that the mortgage was of good credit risk, (ii) commercial and investment banks had weak incentives to ensure that the ultimate holders of the securities would be duly paid for, and (iii) even the credit rating agencies evaluating these securities were themselves also subjected to conflict of interest.
In this paper we will be taking a close look at securitization financing deals. As there are so many different deals, spanning across many different asset classes as well as jurisdictions, we will look to the prominent classes of securitization transactions. The main objective of this paper is to analyze the basic characteristics and market structure of securitization activity and to answer the following questions: (i) What is securitization?; (ii) How is the transaction structured?; (iii) What is the role of each party involved in the securitization process?; (iv) What are the economic motivations and problems of securitization?; (v) What are the major tax, accounting, and legal issues?; (vi) What was the role played by securitization in the 2007/2008 financial crisis; and (vii) How has the Western European market for securitization changed after the 2007/2008 financial crisis?

Definition of Securitization
Generally speaking, the term securitization is used to represent the process whereby financial assets are pooled together, with their cash flows, and converted into negotiable securities to be placed into the market; i.e., it is a technique used to transform illiquid assets into securities. As asserted by Roever and Fabozzi (2003) "… securitization is a form of financing where monetary assets with predictable cash flows are pooled and sold to a specially created third party that has borrowed money to finance the purchase. These borrowed funds are raised through the sale of asset-backed securities (ABS), which can take the form of either commercial paper or bonds". Similarly, Fabozzi et al. (2006) point out that securitization "… refers to the sale of assets, which generate cash flows, from the entity that owns them to another entity that has been specially set up for the purpose, and the issuing of notes by this second entity. These notes […] are referred to as asset-backed securities." 1 Securitization is thus a structured finance technique allowing for credit to be provided directly through market processes rather than through financial intermediariesthe so-called financial disintermediation. 2 The key element of securitization is that the obligation of the issuer to repay investors is backed by the value of a pool of financial assets or credit support provided by a third party to the transaction. Contrary to the traditional secured bonds, where it is the ability of the originator (or issuer) to generate sufficient cash flows to reimburse the debt that determines the risks of the transaction, in securitization the source of repayments/funds shifts from the cash flows of the issuer to the cash flows generated by the securitized assets and/or a third party that guarantees the payments whenever cash flows become insufficient. This idea is corroborated by Vink and Thibeault (2008), which point out that the essential "… element of an asset securitization issue is the fact that repayment depends only or primarily on the assets and cash flows pledged as collateral to the issue, and not on the overall financial strengths of the originator (sponsor or parent company)." Therefore, before performing a transaction it is essential to evaluate the assets' characteristics, because they will affect (i) the creditworthiness of the related securitiesrepresented by a rating assigned by a rating agency; and (ii) the type and magnitude of credit enhancement mechanisms necessary to improve the rating of the securities issued.
The markets for the securities issued through securitization are composed of three main classes [Blum and DiAngelo (1997) and Choudhry and Fabozzi (2004)]: asset-backed securities (ABS), mortgage-backed securities (MBS), and collateralized debt obligations (CDOs).
Securities backed by mortgages are called MBS, securities backed by debt obligations are called CDOs, and securities backed by consumer-backed productse.g., car loans, consumer loans, and credit cardsare called ABS.
Securitization securities are issued as subordinated, negotiable contingent claims (tranches) with varying seniority and maturity, backed by the credit payment performance of securitized assets. These tranches represent different risk-return profiles, with the underlying reference portfolio to be allocated among the various tranches through prioritized contractual repartitioning. It can be presented the following issuers of asset-backed securities: (i) captive finance companies of manufacturing firms that provide financing only for their parent company's products; (ii) financing subsidiaries of major industrial corporations; (iii) independent finance companies; and (iv) domestic and foreign commercial banks. With regard to banks, securitization technique allows the transformation of heterogeneous assets that are 1 See, among others, Davidson et al. (2003), Roever and Fabozzi (2003), Tavakoli (2003Tavakoli ( , 2008, Tasca and Zambelli (2005), Kothari (2006), Jobst (2007), and Krebsz (2011) who explain the structure of securitization transactions. 2 See, among others, Caselli and Gatti (2005), Davis (2005), Akbiyikli et al. (2006), andFabozzi et al. (2006) for further discussion of structured finance. mostly not negotiable into liquid and homogenous securities, suitable for trade. The range of assets that can be securitized by banks is very wide and includes mortgage loans, credit card receivables, bonds, auto loans, and loans to small and medium-sized enterprises, among others.

The Typical Securitization Transaction Scheme
As pointed out, a securitization transaction is implemented through a transfer of assets from the originator to a Special Purpose Vehicle (SPV) or a Special Purpose Entity (SPE), which then issues securities, in the form of debt instruments, to be placed into the market through a private or public offering. Exhibit 1 presents a graphic representation of the fund flows in a typical securitization transaction. As shown, there are two basic deals involved: (i) the asset sale; and (ii) the issuance of securities (considering ABS in this case). For example, if a bank intends to raise money by selling a specific pool of loans through securitization, it is possible to identify the subsequent fund flows during the life of a securitization transaction: (i) the bank (originator) sells the assets to a separate entity (SPV); (ii) the SPV transforms them into negotiable securities to be placed into the capital market; (iii) the issuance of securities (usually debt obligation instruments)backed by the acquired assetsin order to finance the asset purchase; and (iv) the cash flows originated by the acquired pool of assets are then used to pay the principal and interest of the securities to the final investors. 3 Exhibit 1: Fund flows in a securitization transaction. Source: Adapted from Roever and Fabozzi (2003) and Tasca and Zambelli (2005).
The standard structure for securitization in Europe is somewhat different from the United States (U.S.) [Davidson et al. (2003)]. In the U.S. trusts play an important role. They own assets such mortgage loans and investors have a direct ownership interest in the trust. In Europe, all deals use a variant of the following structure: (i) the originator sells the assets to an SPV; and (ii) the SPV then issues a bond, which is purchased by various investors, backed by the assets owned by the SPV. This vehicle company is usually a company subject to corporate 3 The cash collection related to the securitized portfolio is managed by the Servicer (the originator or a third party), which receives a servicing fee. Servicing involves collecting cash from borrowers, notifying borrowers who may fail, and, when necessary, recovering and disposing of the collateral if the borrower does not make loan repayments by a specified time. law, but restricted in activity, and may be exempted from certain taxes. 4 But in Europe, as in any other part of the world, the securitization process involves a standard set of analysis prior to the issuance of securities, namely: (i) assessing the collateral; (ii) modeling cash flows; (iii) quantify risk factors via stress tests or other techniques; and (iv) structuring the transactionhaving in mind several factors, such as the client's wishes, the type of assets, the opinion of the rating agencies, the availability of data, and the investor attraction for the deal. 5 In order to understand the whole securitization process, Exhibit 2 describes the major steps required to accomplish a typical securitization transaction.
Exhibit 2: Basic securitization process. Source: The author.
Next we describe the major steps usually presented in a securitization transaction.
Step 1: the originator identifies a pool of assets (receivables) that satisfy certain features that make them acceptable to be securitized; 6 Step 2: the pool of assets is transferred to an SPV at par 4 As asserted by Davidson et al. (2003), this type of structure "… can be much more costly than a U.S. trust company because in continental Europe it is very common to have a minimum amount of share capital necessary to set up a company." For example, in Belgium, the minimum is 62 Euro thousands, in the Netherlands 20 Euro thousands, and in Portugal 250 Euro thousands (applied to 'Sociedades de Titularização de Créditos'). The U.K. tends to be the most popular jurisdictions for SPVs, as well as Ireland, because there is no minimum share capital necessary. 5 Structuring the transaction requires to deal with the following issues: (i) timing; (ii) risk; (iii) credit enhancement and rating; (iv) legal process and counterpartiescollateral arrangements, counterparty arrangements, bond description, legal opinions, and rating letters -; and (v) costs. 6 The originator typically identifies assets with similar characteristics. Theoretically, any asset producing regular cash flows (e.g., residential and commercial mortgages, credit card receivables, etc.) can be securitized.
Step 2: Asset Pool Sale

SPV Originator/ Servicer
Class A

Class B
Class C Class D …

Receivables
Step 1: Selection of a Pool of Assets Step 3: SPV holds the Asset Pool and issues Securities Step 4: Placement of Securities in the Capital Markets Step 5: Asset Purchase Step 6: Interest and Principal Step 5: Asset Purchase Step 6 value and based on a true sale transaction; 7 Step 3: the SPV holds the asset pool, paying for it by issuing securities; 8 Step 4: securities are offered to capital markets and structured into different classes; 9 Step 5: payment of the asset purchase; and Step 6: the originatorwho has proximity with the borrowers and typically has an infrastructure and systems in place for doing socollects cash flows related to the assets (interest and principal); i.e., retains the servicing function.
The highest rating for Class A (the most senior class) is explained by two factors: (i) the assets' segregation from bankruptcy risks of the originator; and (ii) the implementation of different credit enhancement strategies. One strategy is the creation of a credit risk mitigation device by subordination of Classes B, C, D, …, such that those lower classes provide credit support to Class A. It is possible to say that the size of classes B and C is determined as to meet the rating objective for Class A. Likewise, the size of Class C is determined as to have Class B accorded the desired rating. In other words, the entire transaction is structured to meet specific investor needs. That's why, in a narrow sense, the term structured finance is used almost interchangeably with securitization.
Different credit enhancement mechanisms may be necessary to improve the credit rating of the issued securities and reduce the risks transferred to investors; i.e., credit enhancement serves to protect investors from the risk of collateral not being repaid as expected. 10 These mechanisms can be either internally determined within the transaction structureinternal credit enhancement mechanismsor externally provided by a third partyexternal credit enhancement mechanisms. The issuer should examine the various mechanisms of credit enhancement prior to issuance, to determine the most effective combination. As referred by Fabozzi et al. (2006), "… the reason why an issuer does not simply seek a triple-A rating for all the securities in the structure is that there is a cost to doing so […] In general the issuer, in deciding to improve the credit rating on some securities in a structure, will evaluate the tradeoff associated with the cost of enhancement versus the reduction in yield required to sell the security." 7 True sale or mutually exclusive use of asset pool's cash flows means that the originator would not have any direct claim on the receivables, nor would the investors in the securities issued by the SPC or the SPV itself have any claim against the general assets of the originator. 8 To finance the acquisition of the assets, the SPV issues securities sold to investors. The credit rating of those securities will be based solely on the strength of the asset pool. The issued securities may be senior and junior, or they may be senior, mezzanine, and junior, or they may have various classes, such as class A, class B, class C, and so on. These various classes are created in order to generate differential interests in the pool, such that the senior investors have superior rights over the pool than the subordinated investors. 9 The SPV sells securities in the capital markets through a private placement or public offering, with the help of underwriters. These securities are usually purchased by banks, insurance companies, pension funds and other institutional investors. 10 See, for example, Roever and Fabozzi (2003) and Fabozzi and Kothari (2007) for an in depth description of internal and external credit enhancement mechanisms.
External credit enhancement mechanisms are provided by third-party guarantees, granting for first-loss protection against losses up to certain amount. Examples are: (i) guarantees; (ii) letters of credit; 11 and (iii) bond insurance. 12 This kind of guarantee can either apply to all the issued tranches or, more typically, only to one particular tranche. Internal credit enhancement mechanisms are: (i) subordination; 13 (ii) overcollateralization; 14 (iii) cash reserve accounts; 15 (iv) excess spread; 16 (v) trigger events; and (vi) minimum debt or interest service coverage levels. The type and amount of credit enhancement employed in a transaction represents the matching point of the issuer's need to maximize deal proceeds and the rating agencies' judgment with respect to how much credit enhancement is required to achieve the desired rating on the senior bond classes. One important difference between the approach used to rate securitized debt and bonds is that corporate obligations are rated ex post while securitized products are rated ex ante. Securitization transactions are thus structured with the idea of issuing securities that meet a specific rating profile [Roever and Fabozzi (2003)].
A central and defining characteristic of securitization is that the cash flows generated by a company's financial assets can support one or more securities that may be of higher credit quality then the company's secured debt. To achieve this higher credit quality, the securities used to fund the securitization rely on the cash flow created by the assetsor guarantee by a third partyrather than on the payment promise of the company. Regarding the securitization financing structure, there are two essential characteristics to be highlighted. The first concerns to the SPV, which represents a critical player within the process. Secondly, the transaction is realized through a 'true sale' of assets by the originator to the SPV. The 'true sale' mechanism allows a company to isolate a group of financial assets, separating their risk from the firm. 17 Therefore, the expected return to investors relies mainly on the risk of the cash flows guaranteed 11 It is a financial guarantee through which a bank becomes committed to reimburse credit losses up to a predetermined amount. 12 Also called a surety bond, a bond insurance is a financial guarantee from an insurance company, commonly called monoline insurance company [e.g., Ambac Assurance Corporation (AMBAC); Financial Guaranty Insurance Corporation (FGIC); Financial Security Assurance (FSA); Municipal Bond Insurance Corporation (MBIA); and XL Capital Assurance]. The guarantee provided is for the timely payments of principal and interest if these payments cannot be satisfied from the cash flow from the underlying loan pool. 13 Issuers can increase their advance rates by selling additional bonds of lesser credit quality, which are subordinated in payment priority to the senior bonds issued from the structuring. Subordinated tranches will absorb collateral losses for the benefit of senior bonds. 14 The overlying bonds are lower in value compared to the underlying asset pool: for example, 250 Euro millions nominal of assets are used as backing for 200 Euro millions nominal of issued bonds. 15 Usually from part of the debt proceeds, a cash reserve is maintained in a account and used to cover initial losses. 16 The excess spread results from the positive difference between cash inflows from assets and the interest service requirements of liabilities. It acts as the first line of credit support for the deal and if losses are low, the excess spread will increase. 17 Contrary to the U.S., in Europe, in many jurisdiction (e.g., Germanic type of law), there is a sale or assignment of the assets to an SPV but the perfection of the sale is often postpone until various trigger events occur in order to avoid complicated borrower notification laws. See Davidson et al. (2003) for further discussion of European securitization legislation.
by the pool of assets, rather than the default risk of the originator. The SPV role is critical and provides an investor with greater protection. With the separate incorporation of the SPVwhich is intended to isolate the assetsthe assets are no longer available to the originator or its creditors. 18 Furthermore, the SPV activity is strictly limited to holding the asset pool and issue in turn securities backed by these assets; i.e., the SPV is not allowed to perform other business activities and to assume other obligations.
Financial intermediaries play a crucial role within the securitization process, which includes the following activities: (i) identification of homogeneous financial assets to be securitized; (ii) identification, together with the credit agency (or credit agencies when necessary), of the financial structure of the securities; (iii) if the credit rating analysis is positive, the arranger writes a pre-sale report (and external auditors implement a due diligence of the asset portfolio); (iv) in line with legal firms, the legal contracts are developed (e.g., transfer agreement, indemnity and warranty agreement, corporate services agreement, servicing agreement, cash management agreement and collateral management agreement, trust deed, deed of pledge, and subscription agreement); (v) planning of marketing activities, including a road show aimed at presenting the transaction characteristics to institutional investors; and (vi) issuance and placement of the securities in the primary market. 19 The next phase in the process is the acquisition of the securities by investors. 20

Securitization Structures
Securitization can be implemented basically in two ways: (i) in a so-called true sale securitization, the underlying assets are sold by the originator (a firm or more specifically a bank) to the SPV and thus removed from its balance sheet; (ii) in a so-called synthetic securitization, the underlying assets remain on the balance sheet of the originator, and only risk of the underlying assets is transferred to the SPV by buying credit derivatives such as credit default swaps over these assets [ECB (2008)]. Similarly, Tasca and Zambelli (2005) split securitization transactions into two main types: (i) cash flow based (CFB) securitization or funded securitizationstructured as a sale of assets by a company (originator) to a special entity (SPV), which then issues securities backed by the underlying assets; and (ii) synthetic securitizationstructured in such a way that the credit risk associated with a pool of assets is transferred to a separated entity (SPV). As in synthetic securitization there is no sale of assets, the originator does not receive any cash flow and the SPV is not the owner of the pool of assets, but rather the entity carrying the associated credit risk. This is realized through the use of derivatives like total return swaps and credit derivativesthe most widely used credit derivative is the credit default swap (CDS).
Exhibit 3  CDOs are much more specific instruments to transfer credit risk from one party to another.
Exhibit 3: Securitization instruments. Source: Adapted from Criado and Rixtel (2008). 21 See, among others, Jobst (2003Jobst ( , 2006b and Vink and Thibeault (2008) for further discussion of this subject. Criado and Rixtel (2008) present a enlightening description of each type of securitization instruments.  Contrary to cash flow CDOs deals, synthetic CDOs are 'engineering' so that the credit risk of the assets is transferred syntheticallyrather than by a true saleby the sponsor to investors, by means of credit derivatives. Using this approach, underlying or reference assets are not necessarily moved off the originator's balance sheet, so it is adopted whenever the primary objective is to achieve risk transfer rather than balance sheet funding. 24

Securitization Instruments Funded Securitization Synthetic Securitization
A specific type of CDOs are Multisector CDOs, also known as ABS CDOs, ABS of ABS, CDOs squared (CDOs 2 ), or CDOs cubed (CDOs 3 ). Multisector CDOs emerged in 1999 as a response to investors' desire to securitize their own positions of structured product, with the implementation of both balance-sheet and off-balance-sheet arbitrage deals. These products were used and misused in a way that complexity masked the risk.  Fabozzi et al. (2006), Lancaster et al. (2008), and Tavakoli (2008) for further discussion of CDOs' deals, namely on the difference between cash flow structures and synthetic securitization vehicles.

The Economic Motivations and Problems of Securitization
The Modigliani and Miller (1958)  According to Hill (1996) securitization can help to reduce real-world costs, like regulatory costs and information costs. Information costs reduction seems largest for firms who face severe 'lemons problems' [Akerlof (1970)]available information about such firms is limited, unfavorable, or particularly difficult to appraise. Hill (1996) points out that securitization offers a low cost and credible way for information about the firm's receivables to be produced and provided to investors. 25 Similarly, Iacobucci and Winter (2005) argue that "… asset securitization is driven by the propensity of the market to allocate assets to investors who are best informed about asset values." The rationale for the emergence of securitization transactions should be found in the economic advantages of: (i) increased liquidity and funding [e.g., Roever and Fabozzi (2003), Jobst (2006a), and Krebsz (2011)] 26 ; (ii) reduction of the cost of funding [e.g., Goldberg and Rogers (1988), Davidson et al. (2003), Roever and Fabozzi (2003), Fabozzi et al. (2006), Jost (2006a), and Fabozzi and Kothari (2007)]; 27 (iii) allowing originators to reach a funding sources diversification [e.g., Davidson et al. (2003), Roever and Fabozzi (2003), Fabozzi and Kothari (2007), and Krebsz (2011)]; (iv) improving originators' risk management [e.g., Cumming (1987), Goldberg and Rogers (1988), Rosenthal and Ocampo (1988), 28 Davidson et al. (2003), Jobst (2006a), and Fabozzi and Kothari (2007)]; (v) increasing the segmentation between the origination and investment functions [e.g., Davidson et al. (2003)]; (vi) allowing originators to benefit from regulatory and/or tax arbitrage [e.g., Cumming (1987), Jones (2000), Davidson et 25 Additionally, Hill (1996) argues that securitization may increase the future cash inflows of a firm due to (i) effects of specialization in receivables' origination and retentioneconomies of scope; (ii) agency costs reduction; and (iii) regulatory costs reduction. 26 Roever and Fabozzi (2003) refer to securitization as a reliable and relatively unconstrained source of off-balance sheet financing that mitigates traditional funding constrains and can promote a company's growth. Similarly, Jobst (2006a) points out that securitization "… allows issuers to raise funds and improve their liquidity position without increasing their on-balance sheet liabilities and capital base in a bid to refinance asset origination or investments…" 27 If a corporation wants to raise funds creating another legal entity (SPV) and selling assets to that entity who issue bonds backed by those assets, it can achieve a better credit rating for the bonds issued than otherwise will be obtained if the company will chose to issue corporate bondswith enough credit enhancement, it can issue a bond with a rating triple A. 28 Rosenthal and Ocampo (1988) argue that "… securitization transactions manage these risks [credit, interest rate, and prepayment risks] more explicitly, and therefore more efficiently, than does conventional lending [… and…] it makes these risks more transparent and it also allocates them far more precisely to the players who are best able to absorb them." al. (2003), and Krebsz (2011)]; 29 and (vii) allowing originators to improve key financial ratios [e.g., Goldberg and Rogers (1988), Roever and Fabozzi (2003), Fabozzi and Kothari (2007), and Krebsz (2011)].
It is possible to discuss the main motivations for securitization from both the perspectives of a nonbank corporation and a bank corporation. According to Fabozzi et al. Although all of the above-mentioned economic advantages, securitization also has problems, especially when used inappropriately. Asset securitization transactions are fairly 29 One of the major economic drivers of a new securitization transaction is Basel II (and ongoing forward Basel III). The applicable calculation rules (e.g., standardized approach vs internal ratings-based approach vs advanced ratings-based approach) highly influence the regulatory capital charge. 30 Similarly, Lupica (1998) presents the following motivations for a nonbank corporation to choose securitize its assets: (i) improving liquidity; (ii) increasing diversification of funding sources; (iii) lowering the effective interest rate; (iv) improving risk management; and (v) achieving accounting-related advantages. 31 As pointed out by Jobst (2006a), securitization "… is one operational means of risk management, which allows issuers to reallocate, commoditise and transfer different types of risks (e.g., credit risk, interest rate risk, liquidity risk or pricing risk) to capital market investors at a fair market price." complex and involve a significant amount of due diligence, negotiation, and legal activities. As asserted by Davidson et al. (2003), The most commonly referred problems of securitization are: (i) complexity [e.g., Davidson et al. (2003), Caselli and Gatti (2005), Fender and Mitchell (2005), Fabozzi et al. (2006), and Jobst (2006a)]; (ii) off-balance sheet treatment [e.g., Fabozzi et al. (2006) and Rutledge and Raynes (2010)]; (iii) asymmetric information problems [e.g., Gorton (2009)

Securitization and the 2007/2008 Financial Crisis
The 2007 structured finance products, markets, and business models exposed the financial system to a funding disruption and breakdown in confidence" and that particular products "… exacerbated the depth and duration of the crisis by adding uncertainty relating to their valuation as the underlying fundamentals deteriorated." The capability of securitization to repackage risks and create 'secure' assets from a risky collateral lead to a rapid growth in the issuance of structured securities, most of which were perceived by investors as near risk-free financial assets. During the financial crisis, it was discovered that these securities were actually far riskier than originally perceived by investors and certified by rating agencies. As referred by Gennaioli et al. (2010), "[W]hen investors or intermediaries perceive some securities to be safe, they would borrow using them as collateral, often with very low haircuts…" But when investors and intermediaries realized that these securities were actually risky they would sell them, trying to meet their collateral requirements, leading to an additional fragility from fire sales. Criado and Rixtel (2008) point out a set of weaknesses related with the use of securitization, which were revealed by the financial turmoil, including: (i) banks underestimated their exposure to structured finance products and specific 'off-balance sheet' vehicles; (ii) certain banks retained large exposures to specific securitization instruments, such as CDOs without sufficiently understanding their impact on capital and liquidity positions; (iii) banks resorted to more volatile funding sources including securitization products; 36 and (iv) the process of securitization may have generated unwelcome incentive problems, considering that 34 According to Kiff and Mills (2007) subprime mortgages are residential loans that do not conform to the criteria for 'prime' mortgages and so have a lower expected probability of full repayment, as they are made to more 'risky' mortgage borrowers. Standard and Poor's states that borrowers below A (credit rating) quality are considered subprime. 35 According to Criado and Rixtel (2008) "[A]s risk assessments were adjusted, the financial turmoil spilled over to other financial market segments and risky assetsparticularly those linked to structured finance -were abandoned in favor of 'safe haven' instruments such as government debt securities." As pointed out by the authors, financial market turmoil showed the following characteristics: (i) stock prices fell; (ii) volatility levels jumpedparticularly in the short-term money markets; (iii) interbank money market interest rates verified unprecedented rises; (iv) credit spreads increased; and (v) central banks injected substantial amounts of liquidity into the markets. The liquidity concerns that dominated the initial phase of the financial crisis were accompanied by credit risk concerns and transformed into crises of solvency related to major financial institutions when they started to report losses that were actually much larger than had been anticipated. 36 When securitization markets closed, the funding capability of specific banks decreasedsuch as Northern Rock in the United Kingdomand they were significantly impaired. banks may not have accurately assessed the credit risk of borrowers, when they put their loans off-balance sheet using securitization techniques.
Two major problems can be pointed out underlying the financial crisis: (i) asymmetric information problems, and (ii) agency problems [see, among others, Calomiris (2009)].
Although financial engineering has the potential to create securities and products that better match investors' needs, they also have hazards. Several authors [e.g., Alles (2001), Jobst (2006a, Jobst (2009), andMishkin (2010)] argue that securitization may lead to a severe principal-agent problem when the originator retains little or no interest in the pool of securitized assets. In this case, the originator does not have the same incentive to pay attention to the creditworthiness of its customers as would be the case when the assets remains in its balance sheet. This idea is corroborated by Fabozzi and Kothari (2007), which assert that "[G]iven the ability of lenders to pass along subprime loans into the capital markets via credit enhancement

[…] lenders have been viewed by critics of securitization as abandoning their responsibility of evaluating the creditworthiness of potential borrowers."
Referring to asymmetric information, Gorton (2009) argues that an important problem is the loss of information when high complex structures are used to implement a securitization transaction. In the presence of asymmetric information, originators and issuers might be tempted to pursue their own economic incentives, which imposes a substantial agency cost on efficient asset securitization. Asymmetric information problems can come from (i) the sheet. This idea is also corroborated by Titman and Tsyplakov (2010). They show that poorly performing originators are more willing to originate riskier mortgages because they have less incentive to carefully evaluate the credit quality of prospective borrowers.
It is commonly accepted that most credit is nowadays created using the originate-todistribute model in which the originator of a loan sells it to someone (usually a special purpose entity), who adds it to a portfolio of similar loans, and then issues new securities, holding a claim against the income provided by the loan portfolio. The transition from the traditional originate-to-hold model to the originate-to-distribute model, as well as its reliance on credit markets as a continuing source of credit, has been blamed by academics and practitioners for the financial crisis of 2007/2008. If the originator does not hold the credit it originates, but distributes the loan and its risks to other entities through securitization, the originator has a reduced incentive to monitor the credit granting process. Thus, this model brings with it a major principal-agent problem in the credit screening process, because the credit incentives of the originator are not aligned with those of the entity that ultimately holds the loan. When we add the growing complexity associated with the securitization process, the result is a 'market for lemons' problem [Akerlof (1970)], leading to the collapse of the market for securitized assets.
However, it should be put into perspective that securitized subprime mortgage backed securities only represent 6% of the approximately (at the end of 2007) $10 trillion asset securitization market. Thus, the rest $9.4 trillion of structured products have generally been stable quality securities, with rating transition matrices probabilities equal to or better than the corporate bond market [Lancaster et al. (2008)].
In short, the crisis demonstrated that, in securitization, the value of the underlying cash flows varies with their repackaging, and that repackaging risk does not just eliminate it.
Additionally, when market deterioration becomes systemic, SPVs may be unable to withstand market inertia, and triggers will eventually be breachedcomplex securitization products have introduced systemic risk into the financial system and maybe they have multiplied it. We can thus present some key factors that may help to overcome the shortcomings leading to the credit crisis, namely: (i) reduced complexity; (ii) increased transparency; (iii) increased standardization of transactions; (iv) improved disclosure of underwriting standards; (v) increasing the alignment of incentives between originators and investors; (vi) avoiding active rating shopping; (vii) reduced overreliance on credit ratings; (viii) increased risk management and risk mitigation; and (ix) the need for investors to understand the benefits and drawbacks of arbitrage mechanisms.

Tax, Regulatory, Accounting, and Legal Issues
The main tax issue in securitization is related to whether there will be taxation at the level of the vehicle company; i.e., will the payments of the borrowers be considered taxable income to the SPV? Because the sole purpose of the SPV is to buy and hold assets until they liquidate, SPVs have no outside sources of income. The introduction of an entity-level tax would render most securitizations uneconomic. Moreover, originators desire to treat securitization as a financing for tax purposes rather than as a sale. As pointed out by Davidson et al. (2003), "[S]ale treatment from a tax standpoint would generally accelerate taxable income. Issuers are also concerned that the securitization is tax effective and does not result in nondeductible interest costs or double taxation of residual income." In a typical securitization, a trust is used to receive the pool of assets and issue securities backed by these assets, because it allows to minimize the issuer's tax burden and it also establishes a legal separation between the originator and the pool of assets deposited in the trust. 37 From a bank regulatory perspective, the originator is required, under new regulation from January 2011 onwards (Basel III), to retain at least 5% of the transaction for a funded transaction. In a synthetic transaction the originator would equally keep the first-loss piece, by transferring only the risk of higher tranchesvia credit default swaps (CDS) or similar instrumentsto investors.
The key accounting issue is whether the securitization will be treated as a 'true sale' or a financing operation. Originators generally seek to record a securitization as a sale which requires immediate recognition of gain or loss on the transaction. Thus, based on the proceeds of the sale of the bonds and the value of retained interests, firms may record a gain (or loss) on sale when completing a securitization transaction. As pointed out by Roever and Fabozzi (2003), the principal "… among the accounting issues is whether the financing meets the requirements for off-balance-sheet treatment." Usually, an asset transfer that is treated as a true sale for legal purposes qualifies as off-balance sheet financing if the SPV is a legally independent company from the seller.
The fundamental legal issue in securitization is whether the vehicle company, created for the purpose of holding the collateral, has sufficient title to the assets and is protected from bankruptcy or other disruptions at the issuing [Rutledge and Raynes (2010)].
In summary, the key elements of any securitization transaction are legislation, regulatory framework, and tax environment; i.e., if an originator considers to securitize a portfolio of assets it has to be aware of applicable laws, security regulation, and tax regime that may impact on the transaction. This holds particularly true for a post-credit crisis market. The securitization market has seen considerable regulatory changes during and following the credit crisis, which are likely to continue until 2014/2015. 38

Introduction
According to Tasca and Zambelli (2005), "[T]he concept of asset securitization was introduced in the US financial system in the 1970s, when the Government National Mortgage

Association issued securities backed by a pool of loans, represented by residential mortgages."
This is the major reason for the development of the strong U.S. housing finance market.
37 See Davidson et al. (2003) for a more detailed description of issuing vehiclese.g., grantor trusts, owner trusts, revolving trusts, master trusts, real estate mortgage investment conduits (REMICs), and financial asset securitization investment trusts (FASITs). 38 See Krebsz (2011) for further discussion of the legislative initiatives implemented in E.U. and U.S.; e.g., Basel III, EU Green Paper on Corporate Governance, Dodd-Frank Wall Street Reform and Consumer Protection Act -Asset-backed securities, and proposals to strengthen financial supervision in Europe.
Afterwards, securitization technique has been applied to other assets such as credit card payments and auto loans receivables. It has also been employed as part of asset/liability management, in order to manage balance sheet risk for financial institutions.
The first European transaction was also a RMBS, issued in the U.K. in 1987. Around the early 1990s the first securitizations from other European countries have started. The first countries to join the U.K. in issuing ABS were Spain and France. These countries continued to be the main issuers until the mid-1990s, when Finland, Sweden, Ireland, Italy, and Germany joined the growing list of countries using securitization. But it was in the second half of the 1990s that securitization really began to take off as legislative changes in many countries began to simplify the process and to allow securitization to expand into new countries and asset     Table 1 describes the characteristics for the sample of bonds in the DCM Analytics database with the deal type code of "asset-backed security" and "mortgage-backed security". The second column details the number of tranches issued between 2000 and 2011, while the third column describes the total value (in Euro millions). The fourth column presents percentages of the total value for each year.    The most remarkable finding is that AS bonds are always issued with guarantees. This largely meets the standard characteristics of securitization. Contrary to the traditional corporate bonds, where it is the ability of the issuer to generate sufficient cash flows to repay the debt obligation that determines the risks of the transaction, in securitization the source of repayments shift from the cash flows of the issuer to the cash flows generated by the securitized assets and/or a third party guarantor, in case of default.

Asset Securitization Bonds
Looking to the evolution of the structured finance markets, it is possible to conclude that securitization has become one of the most visible consequences of financial innovation in