Without disclosure on an observable event basis (where an observable event includes a payment, delinquency, default, modification and bankruptcy), investors do not have the current information they need on the underlying collateral performance to know what they own.
Equally importantly, without disclosure on an observable event basis, potential buyers do not know what they would be buying. As a result, the market for these securities is illiquid.
Observable event based reporting is the foundation for a deep, liquid capital market.
China has reopened the gate on loan-backed securities, after suspending a trial in the aftermath of the global financial crisis.
China's central bank ... has authorized a 50 billion yuan ($7.85 billion) quota for the country's lenders to securitize their loans. Lenders are required to submit securitization plans for regulatory approval. The quota is expected to be fulfilled by year-end and more quotas are likely to be authorized in the future.
China's loan-backed securities trial started before the 2008 global financial crisis. However, the trial was suspended after financial derivatives such as asset-backed securities were seen as the culprit of the crisis.
The country first launched a trial in 2005, when China Development Bank issued bonds based on 51 loans totaling 4.7 billion yuan.
The quota is a pittance compared with the banks' total assets, which were at 120 trillion yuan at the end of the first quarter, but it opens a new path for lenders to get rid of non-performing loans and liquidate assets.