Neither a borrower nor lender be?

With the first day of the Ashes upon us, perhaps it's appropriate to begin with a cricketing analogy: the capital markets are like England fast-bowler Steve Harmison. No I don't mean that they're a lanky, Durham cricketer who continually fails to live up to his potential, but rather in the sense that they feed off confidence. With it, they both fly; without it, nothing functions properly. Investors, governments, corporates, regulators and all the other assortment of bodies that make up the financial market, are ultimately at the whim of something completely intangible – sentiment.

For people that spend most of their lives thinking in acronyms – NAV, LIBOR, EBITA, AUM – capital market participants can behave just like the rest of us and follow the herd rather than logic. For reasons that require no explanation, these players have generally been crestfallen, sometimes suicidal or simply lacking confidence for quite some time now. With that in mind, perhaps the rain that stopped play of late has abated, and everyone is ready to take the field again. Well, this would certainly be the impression if we look at the thorny subject of securitisation. There have been a number of editorial pieces this week suggesting that this art is showing signs of life.

How things change – just a few months ago for any banker to put his head above the parapet and proclaim the case for securitisation would have been castigated, such was the climate of hostility against the practise. Now we have both Goldman Sachs and Barclays Capital in the Financial Times discussing their new structural innovations – dubbed "insurance" and "smarter securitisation" respectively. However, it's important not to get ahead of ourselves, ultimately the markets for securitised loans are still very much frozen. That said, the "rocket scientists" who designed these complex instruments have not just been twiddling their thumbs. Financial engineering is alive.

The freeze in the securitisation markets has caused a dramatic shortage of lending power – $8,700bn of assets are currently funded by securitisation after all. Banks cannot possibly plug this gap with traditional lending, such is the regulatory pressure they're under to improve capital ratios. Some have suggested that this might be an opportune moment to bring back the bundling of loans into tradable securities. Many banks are petrified about lending, or constrained by their government owners and overseers to de-leverage their balance sheets. As George Hay of breakingviews explains: "If strong institutions can be found to take on the unwanted loans, everyone could be better off."

Despite the attempts to kick-start the securitisation markets, it doesn't look like we'll see a return of the incredibly complicated CDO squareds, CDO cubeds and the like anytime soon. These structures have been so discredited and investors so wary of them that they've become persona non grata. Even during the worst of the financial crisis, equities were always traded – unlike the highly complicated structured products which people wouldn't touch with a barge-pole. The CDO or CLO market dried up, even if they were fairly 'sound' – as market confidence dissipated, they simply became untradeable.

As the wheels of securitisation slowly start to move, regulators should (and will) keep a watchful eye on the process. Securitisation should theoretically help keep the financial system balanced by making it easier for banks to manage their balance sheets. However, in practise it became a tool for banks to hide leverage, moving the securitised loans off their balance sheets and into those infamous structured investment vehicles.

Risk and regulation are aspects of the new financial order that nobody can deny. It's become a matter of political expediency as well as economic necessity. Although not every attempt to regulate will pass through, I think we all know that financial institutions are going to face more regulation and supervision rather than less. Investors will also demand far more transparency. While it was okay to push on without question while the going was good and returns delivered, the world is just not like that anymore.

The interest of parties must be more closely aligned and this is why the European Commission is demanding that rating agencies and bankers disclose more information about deals. As the FT reports, banks may well face calls to keep 5 per cent of any securitised bonds that they arrange, so they have enough "skin in the game" to monitor credit risks properly. The direct link between borrowers and lenders must be preserved if this market is to stand any chance of real recovery. Accountability, transparency and good governance are going to be bywords going forward.

The Guardian's Elena Moya contends that Goldman Sachs's and BarCap's securitisation initiatives represent a "sign that the City is returning to pre-credit crunch levels of confidence." That may well be overstating the case, as the market is still far from out of the woods, but it's telling that a practise so criticised for triggering the financial crisis is taking a few tentative steps into the open. Perhaps the rain has stopped and the players are now looking to take guard. They'll need to play with a straight bat though.

JS