How Blockchain will change the Securitisation space (1/2)
June 11, 2019
Securitisation in simple terms
Securitisation is necessary because somebody has surplus money to invest somebody needs to borrow money to buy a house and you need to connect these humans in some ways now unfortunately what happens is that this money which is somebody’s pension investment is turned into somebody’s borrowing for the house through a very complex multi-layered process which involves all the players of the financial services Industry.
China and India for example have very high savings rate and therefore people just deposit into these banks and banks in turn will give this money to borrowers, so none of this is really required in the same scale as it is required in the U.S.
This market came to a standstill and was to truly dead because this is what led to the 2008 financial crisis but the market has call recovered to the same levels as 2008 it has not only recovered for example I gave you the example of India where it is just shooting through the roof now because the deposit rates are going down significantly and hence addressing how securitization gets done is absolutely critical.
But like all things and financial services industry this is a process where there is a big trade-off between risk and efficiency so if you try to put a lot of additional compliance and controls int this process the efficiency drops and actually securitisation is worse because here it is not only a difficult trade-off actually with every additional step in securitizations transactions which is the trusty coming and the rating agency coming and everybody is adding a layer of cost but reducing transparency so normally what would happen if you improve efficiency, risk management would drop but in this case it’s a double whammy the efficiency dropping and the risk is increasing
Between the investor and issuer there are so many layers that if you think of 2008 where Florida real estate market crashes in Feb March continues to crash after three four layers there is somebody holding a Derivative who even in August thinks that he/she is safe and again this is an over simplification but that’s information asymmetry there’s layering of cost because so many intermediaries are getting involved
Portfolios do get rated by rating agencies like Moody, S&P etc but they get rated when the transaction is happening so for e.g. transaction is happening in March, the portfolio will get rated then after that if the whole market is completely changed in next three four months the portfolio is not continuously getting rerated and every single securitisation transaction is a long one on one negotiation so if you went to our securitizations conference fifty six percent of the participants would be lawyers that is how one on one negotiated contracted this industry is.
Now in this context of the problem statement how is blockchain a solution
- As all the players in the financial services industry is involved and because of being on blockchain every one of those players has a single view of what the transaction and what the data is.
- Comprehensive tamper proof audit trail.
- Efficient Market leads to better valuation and price discovery so if you get multiple issuer
and multiple investors onto a platform you can bring much greater benchmarking and
visibility than this completely isolated one on one transactions
- Speed and certainty, at Intain we are using power of Artificial Intelligence together with
Blockchain to achieve the desired speed and certainty.
In next article of founder series we will talk about how Intain is trying to solve the securitisation problem using Blockchain with Artificial Intelligence and is on the mission of making sure that there are no more crisis in securitisation space like 2008.