"The strong motivation for the current preference of investors for secured issuance is about repositioning themselves towards the front of the creditor queue. That is the fundamental point of differentiation between the various forms of funding. But ultimately, everyone can't be at the front of the queue.
In theory, or in a less risk-averse environment than the current one, pricing should equalise the incentives to issue and purchase the various forms of funding. Investors should be compensated for their risk of being further down the creditor queue with a higher risk premium. But in today's environment, there are plenty of examples where market pricing is not always sending the most accurate signal. In due course, investors in bank paper might again come to the realisation that there is not as stark a difference between secured and unsecured issuance, as current pricing would suggest. Investors need to heed the seminal words of The Saints: ‘Know Your Product’ and do the necessary due diligence.
So in the end, I think we should return to a world where banks access all five of the sources of funding I outlined at the beginning of my talk. It is useful to have a diverse range of funding instruments at hand, as at various points in time, some markets are more functional than others. A world where the only source of funding available is secured is just not sustainable."
