"Underwriting of structured finance transactions in 2018 will generally maintain its rigor, though competition among lenders and continued high investor demand are driving some weakening, including in US CLOs, US and Canadian auto ABS and some European asset classes," says Moody's analyst, Peter McNally. "Healthy global economic growth will however support the credit performance of assets underlying securitizations, even in sectors where underwriting standards are loosening."
While Moody's expects steady financial conditions in the year ahead, with global GDP growth forecast to come in at 3.2%, it also notes rising consumer and corporate leverage and a buildup of financial stability risks over the past decade in a low interest-rate environment. Since 2007-08, regulatory enhancements, policy support and healthy economic growth have strengthened the financial system, but a reversal of expansionary monetary policies including interest rate rises in advanced economies, along with increased consumer and corporate leverage, threaten continued payment stability in some securitization products.
Meanwhile, regional and country-specific political risks will continue to flare up, and will remain a challenge for global credit in 2018 and beyond. Government policies will continue to drive changes to securitization collateral and structures in 2018, Moody's says. While in Europe many new rules, such as recently enacted guidelines that restrict bank lending, are still working their way toward implementation, in the US Congress has been eyeing rollbacks of some crisis-era rules and guidelines designed to limit risk in the financial markets, such as risk-retention rules for issuers of securitized products.
At the same time, securitization new issuance will remain strong in 2018, with a number of products likely to emerge or spread to new regions.
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