Europe’s securitization markets¹ may still be ten times smaller than their US counterparts, but they are growing much faster. Since 1998, the value of new issues of fixed-income securitized assets has grown at a compound annual rate of about 55 percent in Europe, to reach $160 billion in 2001, compared, over the same period, with 11 percent in the United States, where their value reached $2 trillion. Europe’s bankers might have hoped to earn higher fees and profits from securitization than they do in their traditional fixed-income business, in which profits are thin, but recent McKinsey research shows that only a few have generated profits in these securitization markets.² Most players will have to rethink their approach.

The product itself is sound: securitization and the resulting assets have been phenomenally popular with both issuers and investors. Issuers like the idea that selling asset-backed securities helps them reduce the cost and diversify their sources of funding, thereby making them less reliant on bank borrowing, for example. Meanwhile, investors such as insurance and pension companies, mutual funds, and conduits, drawn by the high credit rating of the top tranches and the better yields of securitized assets as compared with...