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Update Newsletter: Winter 2004 – Special Conference Issue

Securitization: Finally a Mature Market

Vernon Wright, executive vice chairman and chief finance officer, MBNA Corporation, and chairman of the American Securitization Forum, delivered the conference keynote address, providing background and context for the program agenda. He began by noting that in just 19 years, the asset-backed securities (ABS) market has grown and matured to become “a mainstay of the capital markets as we know them today.” Interestingly, Wright’s own professional career has been intertwined with these developments as he has directly participated in the market’s evolution and growth.

In his view, a compelling indication of the market’s maturity is its sheer size, scale, and liquidity. Today, asset-backed securities comprise almost one-third of the U.S. private debt market. Furthermore, market growth has accelerated. In the last eight years alone, outstanding asset-backed securities have increased from $300 billion to $1.7 trillion. While there are now a myriad of asset types that make up the broader market, the lion’s share is composed of consumer-based receivables, including credit cards.

In large part, reflecting consumers’ increasing preference for cards as their payment vehicle of choice, credit card asset-backed securities has been an important factor in the market’s growth. In the current year, U.S. credit and debit card purchases are expected to reach $2.1 trillion, with over 70 percent of this total billed to credit cards.

Of course, all of this growth in credit card receivables has to be funded, and increasingly, card issuers and other consumer lenders have turned to the ABS markets. Importantly, Wright noted, companies’ access to broader funding sources has also provided increased choice and availability of credit for consumers. He emphasized the overall benefits to the economy, arguing that “the severity of the [recent] recession was mitigated to some degree due to the increased liquidity provided by the securitization markets.”

Another characteristic that affirms the new mainstay status of securitization is its importance as a viable alternative funding source. Securitization has provided a wide range of issuers with alternatives to traditional debt markets, facilitating business growth while expanding the base of funding and reducing short-term financing risks.

As Wright emphasized in describing the impact of expanded funding alternatives, "It is [the] investor base that lies at the heart of securitization's success." Drawn by the comparative stability of the ABS market, investors have driven widespread acceptance of securitization. This, he noted, is true worldwide and means that "many who would not buy a company's direct debt are happy to invest in its asset-backed securities." This is truly a global market, since MBNA's experience shows that many of its ABS investors are based abroad.

Along with the benefits afforded securitization in reaching maturity come increased scrutiny from regulators, accountants, lawyers, and investors. As Wright noted, this added attention provides further evidence of the market's size and importance. In fact, he argued that "this sort of scrutiny and the debate that it engenders only makes the industry stronger."

Alluding to a number of topics on the conference agenda, he described several current issues facing the industry. These include bank capital adequacy, accounting standards related to the transfer of assets to securitization vehicles, and the risk of impact from poorly structured transactions spilling over into the broader markets. Wright closed by emphasizing the need for dialogue, asserting that "it is this sort of discourse that allows all of us to discuss, debate, and determine the appropriate course of action that we must take to continue the robust development of the securitization process."