A vital part of my job as CEO of the Structured Finance Association — which represents the firms that make securitization happen and, as a result, enhance lending and keep our banking system nimble and dynamic — is helping people grasp how our industry works and the very real and valuable impact it has on people’s lives.
So first, some basics. What is “structured finance”, anyway? And how is it any different than just “finance”? Good question.
“Finance” refers to the process of allocating capital from those who have it and want it to grow to those who want it in order to borrow and invest. That’s it. Who has capital? Well, 401(k) investors, pension funds, other retirement funds, asset managers, insurance companies and community banks are all good examples. And who needs capital? That list includes prospective homeowners, car buyers, small business owners and even the government.
Connecting these investors and borrowers does not simply take place by only selling a loan or equity in a company. Instead, investors are seeking investments that meet their particular risk/return appetite ranging from a highly risk-averse retiree with a short-term return horizon to an insurance company willing to invest in a long-term building project. Structured finance matches these investor needs with borrowers who want a very specific type of loan, such as a 30-year fixed rate home mortgage that the borrower can repay at any time without penalty.
To some readers, this process sounds complex. But its purpose is actually quite straightforward. In structured finance, banks and other lenders make loans. They take those loans, turn them into bonds or other securities and sell them to investors. This process not only allocates capital efficiently, but it also allows banks to shed old assets in order to make new loans, to match investor appetite with all kinds of borrower needs, and to keep the economy growing at rates higher than countries without this dynamic source of financing.
Securitization – which is really a synonym for structured finance – finances car loans, credit card loans, home loans, equipment loans, small business loans, and more. Today, anytime someone in the United States borrows money, that loan is probably ending up in a deal that connects borrowers in the U.S. with the global financial systems. And in a roundabout way, the selling of each loan makes it possible for someone else to get a loan, too.
Our association’s 360+ members make all that possible. Importantly, they do so with a strong commitment to the safety of consumers and the system.
As someone who saw firsthand the financial system grow completely untethered from reality and approach the brink of collapse, and who ultimately lost his job during the 2008 financial crisis, I can’t overstate how seriously I take our duty to grow credit availability and the real economy in a responsible manner. And I’m not alone. Our entire membership shares this commitment. We understand that long-term financial stability is in everyone’s interest. We feel strongly that the expansion of credit our industry provides is made safer by a variety of post-financial crisis reforms. Regulatory reforms, coupled with safeguards the industry has put in place, protect the system and consumers. Those protections promote a stable economy. And we know that if we do our jobs well the economy grows, but if we make mistakes, it has real consequences. In short, we take our role seriously.
Today, the association is rolling out our new name (we were, until yesterday, the Structured Finance Industry Group) and a new website to help us communicate and connect policymakers, the public and those in the structured finance industry. We also want to help demonstrate how, when done responsibly, securitization brings important value to our economy. It helps consumers buy cars, make essential purchases with their credit cards, realize the American dream of homeownership and send their kids to college. It helps Main Street businesses that need access to credit to fuel their growth. It makes our financial system more liquid, diffuses risk and lowers financing costs for everyday Americans.
This site is a resource for anyone who wants to understand our industry better and keep our financial system robust and safe. It’s also a tool for sharing progress on our other important roles: setting best practices for the industry, helping the financial system better serve the needs of all communities, and establishing industry consensus on issues that matter to our members. Our goal is to help securitization finance real economic growth and to do so without putting the economy at risk. That is an objective worth accomplishing.
Thanks for visiting, and please reach out to us if you have questions about our industry. We’d love to answer them.
Michael Bright is the Structured Finance Association’s CEO.