Remember the global financial crisis? Well, high-risk securities are back | Private equity | The Guardianhttps://www.theguardian.com/business/2024/nov/24/remember-the-global-financial-crisis-well-high-risk-securities-are-backthe proliferation of these mortgage-backed securities in the early 2000s meant there was a catastrophic ripple effect across the global financial system when borrowers started to default on their home loans.
The resulting crisis in 2008 triggered a crackdown by regulators. They introduced new rules that could help ensure that asset-backed securities – once allegedly referred to as “crack cocaine of the financial services industry” by the billionaire Guy Hands – would never again spark such a massive meltdown.
But, 16 years later, some experts believe new risks are emerging. And this time, they are linked to highly indebted companies backed by private equity firms, which are part of the growing but opaque portion of the financial system known as the shadow banking sector. Shadow banking refers to financial firms that face little to no regulation compared with traditional lenders, and includes businesses such as hedge funds, private credit and private equity funds.
While the use of securitisation dipped in the wake of the 2008 financial crisis, as a result of a tarnished reputation and regulatory backlash, its popularity has subsequently risen. Today, the global securitisation market covers about £4.7tn of assets, according to estimates by analysts at RBC Capital.
The UK accounts for about £300bn of that total, but more than half – about £180bn – is part of the so-called public securitisation market.