William Dudley, the president of the Federal Reserve Bank of New York, predicted the securitization market will shrink.
"The demise of parts of the shadow banking system such as the … [structured investment vehicles] and the fact that banks are likely to have to consolidate some off-balance activities back on to their books at the end of this year should reduce the overall demand for and supply of securitized product," Dudley said in a speech at a Securities Industry and Financial Markets Association conference.
He also expects banks will retain some risk on their balance sheets.
"The notion is that with 'some skin in the game,' those making the loans will show greater due diligence in terms of the underwriting standards applied to the underlying loan originations," Dudley said.
The New York Fed chief said the Term Asset-Backed Securities Loan Facility could be expanded this summer to include "legacy" residential mortgage-backed securities.