Bank warns that complex debt products 'may not survive'

By James Mackintosh and Paul J Davies

Published: November 21 2007 02:00 | Last updated: November 21 2007 02:00

Investment banks need to standardise complex structured credit products if they want to restart growth in the stalled market, Sir John Gieve, the Bank of England's deputy governor for financial stability, said yesterday.

Sir John said "sophisticated opaque bespoke products may not survive" the recent market disruptions and called for structured credit instruments to be redesigned around easilyunderstood building blocks.

The markets for all kinds of structured finance products have been in turmoil since growing problems among US subprime mortgage borrowers spilled over into a broader fear about contagion to any and all complex debt products.

The consequent downgrades of some instruments and draining of liquidity from these markets has left banks and investors with some very large losses and exposure to products that are often very difficult to value.

Central bankers and policymakers around the world have been calling for efforts to improve these markets since the US mortgage problems grew into a full-blown credit squeeze in late summer.

Sir John also said there could be further tightening in money markets before the end of the year and said he suspected there was more bad news to emerge from the hedge fund sector - although he said hedge funds were not to blame for this year's crisis. "People are going to want products built up of units they understand," he told a conference organised by France's Edhec Business School. "The success the market has in doing that redesign will determine whether the rapid growth of the last few years resumes."

The value of collateralised debt obligations exposed to the US subprime meltdown have been hammered this year, and the difficulty of working out underlying exposure has tainted many other structured products.

Writing in the Financial Times in October, Christine Lagarde, France's minister of economy, finance and employment, said: "Transparency with regard to the actual packaging process of securitisation should be heightened."

The term "securitisation" covers almost as diverse an array of products as the term "hedge fund" does investors. Some people in the industry warn that while transparency and standardisation may be easy to improve in areas such as prime residential mortgage-backed bonds, these are not the areas causing problems.

In fact, they say, transparency is most needed in areas where it is most difficult to improve.

Copyright The Financial Times Limited 2007