A Comparative Study Of European And American Asset Securitization Model And Its Enlightenment To China

China initiated its securitization experiment at the end of 2005, with a very prudent approach by allowing only two qualified banks to start the business in the inter-bank bond market. This was the so-called first experimental stage of securitization in China after a long period of preparation. About 3 years later, the experiment entered into the second stage where a few more banks and financial institutions were allowed to participate in the business. Global financial crisis, however, broke the assumed path of development and soon froze the market before these new participators started any new issuance of securitized products. That was also the time for China, de facto, suspended the experiment with no timetable to resume. Until today, the market has not come back yet.The financial crisis was triggered by American sub-prime loan crisis and spreaded all over for its connection to securitization, a financial innovation prevailed in America since the 80s of last century. The pain of financial crisis made some people think that whether securitization in America, dynamic and innovative in nature, was only accidentally tied to the sub-prime loan crisis or there was a fatal bond between them due to some kind of defections in its structure. On the other hand, with a deadly frozen market, the practitioners in global markets are also concerned about what will be the way out for securitization in post-financial crisis.The sudden pause of China’s securitization experiment made the market inaccessible for commercial banks who needed to transfer or "flow" their assets in exchange for liquidity. In recent two years, as the shortage of liquidity severed, Chinese banks innovated some special products with similar functions of securitization to liquidate their assets by selling those products to individual investors over the counter, such as unit trust on "true sale" basis for bank loans. Given the high potential risks and the weak investor protections, Chinese regulatory authorities issued a number of notifications to dismiss such innovations from the market place. However, it seems that where there is a rule, there is a way to get around as long as motivation exists. Bank loan transfers, to some extent and in more concealed ways, still prevail in practice in China. Therefore, it is of a pressing need for China to set the tone for further improving and reforming the securitization market and make it a more standard, transparent and regulated market with proper risk control.Undoubtedly, that should be done only after the lessons of the financial crisis have been learned.At first, the thesis, under the broad context of global financial crisis, attempts to explore the defections of American securitization through in-depth theoretical analysis, on the basis of understanding of the evolutions of the securitization and the clarification of the relationship between securitization and financial crisis. Also, by taking a close look at the new financial regulatory framework in America, which took shape upon the issuance of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21st of 2010, the thesis analyses the lessons learned from financial crisis by American financial industry and its regulators.An important feature of the thesis is that it also studies the covered bond or CB, a bank loan based securitized product in Europe with a history of existence over 200 years, recorded no single default case nor any connections to triggering any financial chaos in history. By contrasting the CB with the American assets-backed securities or ABS (the name of the securitized products in America), a more solid understanding of the imperfections of the ABS and its potential risk or fatal bond with financial crisis is then abstained.The research methodologies adopted in the thesis include historical approach, comparison and contrast approach and institutional analysis. The historical review and analysis of American and European models of securitization lay important foundations for the study of the subject and developing a theme to guide the research. Comparison and contrast, on the other hand, play critical role in leading to in-depth analysis on two major differences of the two models, out of other dissimilarities, namely, the innovative ability and the feature of credit risk transfer of the products. When study the causes of the differences, the institutional diversity in legal and regulatory systems of the two models are distinguished as a unique attribution and the values of the property rights contained in ABS products are also found deceitful under the cover of fair trade. The research is then turned to theoretical analysis, in particular, the institutional analysis to explore how different institutional systems and the property rights division techniques affect the innovative ability and the risk control of the two models. All these finally contribute to reaching conclusions for China to choose a proper securitization model.As for the part of model selection and policy suggestions for China’s securitization market development, the thesis argues that European model, with features of solid risk control but less innovative and liquid, shares more similarities in legal system and regulatory practices with China. American model, though more innovative and liquid but subject to more effective regulatory supervisions, should be carefully considered due to the high degree of dissimilarity of the legal systems and regulatory frameworks of China and America.Based on the arguments, the thesis then puts forth its considerations on choosing a proper model of securitization for China from two perspectives. Theoretically, China suits European model more than American model, the reasons include:1) China’s financial industry is still on its infant stage comparing to developed markets and a more prudent approach towards financial innovations is very necessary; 2) Chinese regulators, in reality, have formed a very prudent style in adapting financial innovations in the past three decades; 3) China’s regulatory framework, to some extent, is not designed to encourage very active financial innovations; 4) strengthening risk control on financial sector in the post-crisis era, has become a common understanding in most countries in the world. Therefore, European model,with strengths in risk control but weak in innovative ability, suits well to China’s development stage.However, from practical standpoint, China may consider a parallel development of two models, the reasons include:1) the parallel development of the two models, each with its strengths and weaknesses, will create a competitive environment to force out those unfavorable innovations in the market place; 2) two models will allow broader and diversified financing choices for banks in securitization; 3) they will promote the development of China’s bond market; 4) there are no institutional barriers in China for the parallel development of the two models; 5) The existing regulations of ABS type of securitization in China can be improved from learning the lessons of financial crisis, especially the lessons learned by American regulators, combining with the consideration of China’s own development needs and its experimental highlights; 6) European experience in the parallel development of the two models can be good references for China to design its own system and regulatory framework.The thesis then proposes some policy recommendations for the reforms and development of China’s securitization market.Some new ideas of the thesis include the following:1. Clarified that European covered bond or CB is a securitized product in nature, though different from American assets-backed securities or ABS in feature, and explored the origin of CB and its evolution.2. Conducted a wide range of comparison and contrast of two models and drawn a conclusion that the innovative ability and the feature of credit risk transfers are the two major distinctions of the two models.3. Explored the fundamental causes of the different innovative abilities and risk control of the two models from institutional perspective.4. Identified the essential causes of the different feature of credit risk transfers of the two models by analyzing the values of the property rights contained in CB and ABS respectively and the techniques of the property rights divisions innovated by ABS. It concludes that it is the insufficient value of property rights contained rather than the innovations in ABS the cause of the problem.5. Put forth constructive suggestions on choosing a proper development model of securitization in China from both theoretical and practical perspectives and analyzed the rational and feasibilities on the parallel development of the two models in China.The weaknesses of the thesis include:lack of more sophisticated mathematical models to further deepen the analysis on logical level.