An unprecedented process of deregulation took place in the banking sector in the three decades prior to the Global Crisis. This column argues that during periods of intense bank competition, financial innovation can compound the adverse effects of competition on stability. Coupled with strong competition, the significant use of one such innovation – securitisation – in the run-up to the crisis was related to high levels of bank risk.
David Marques-Ibanez, Michiel van Leuvensteijn, 03 February 2017
Ata Bertay, Di Gong, Wolf Wagner, 02 November 2015
Since the Global Crisis, a broad discussion about the future of securitisation has emerged. This column presents new evidence on the relationship between securitisation and economic growth. The impact of securitisation depends on the underlying type of collateral. Securitisation of business loans may encourage investment and spur economic activity, but securitisation of consumer loans may at the aggregate divert resources away from productive purposes.
Benjamin Nelson, Gabor Pinter, Konstantinos Theodoridis, 16 March 2015
There has been an extensive debate over whether central banks should raise interest rates to ‘lean against’ the build-up of leverage in the financial system. This column reports on empirical evidence showing that, in contrast to the conventional view, surprise monetary contractions have tended to increase shadow bank asset growth, rather than reduce it in the US. Monetary policy had the opposite effect on commercial bank asset growth. These findings cast some doubt on the idea that monetary policy could be used to “get in all the cracks” of the financial system in a uniform way.
Jean-Pierre Landau, 02 December 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
Charles Wyplosz, 12 September 2014
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
Bruno Biais, Jean-Charles Rochet, Paul Woolley, 21 August 2014
The Global Crisis has intensified debates over the merits of financial innovation and the optimal size of the financial sector. This column presents a model in which the growth of finance is driven by the development of a financial innovation. The model can help explain the securitised mortgage debacle that triggered the latest crisis, the tech bubble in the late 1990s, and junk bonds in the 1980s. A striking implication of the model is that regulation should be toughest when finance seems most robust and when innovations are waxing strongly.
Markus K Brunnermeier, Yuliy Sannikov, 03 June 2014
Eurozone monetary policy transmission is broken. A key aspect of this is the failure of credit to get to small and medium enterprises, and consumers. This column uses the ‘I theory of money’ to diagnosis the problem and propose ‘prudently designed’ asset-backed securitisation as the cure. This would transform illiquid SME and consumer loans into a liquid asset class that would broaden the transmission mechanism while providing a lasting intermediation market for this segment in the Eurozone.
Taylor Begley, Amiyatosh Purnanandam, 01 April 2014
The recent financial crisis was followed by discussions about that went wrong in the securitisation markets. This column describes some empirical work in the area of informational problems in the securitisation markets. In particular, it examines the tranche structure of deals in the private-label residential mortgage-backed securities (RMBS) markets. The role the equity tranche played in mitigating the information problems in the period up to the crisis is discussed. A larger equity tranche is related to superior ex-post default performance, as predicted by some models of contracting under asymmetric information.
Stijn Claessens, Zoltan Pozsar, Lev Ratnovski, Manmohan Singh, 12 January 2013
The risks associated with shadow banking are at the forefront of the regulatory debate. Yet, this column argues that there is as yet no established analytical approach to shadow banking. This means that policy priorities are not clearly motivated. But if we analyse securitisation and collateral intermediation – the two shadow banking functions most important for financial stability – a solid framework that includes existing policy recommendations, as well as some alternative ones, begins to emerge.
Hans Degryse, Santiago Carbó-Valverde, Francisco Rodríguez Fernández, 23 September 2012
This paper studies whether the involvedness of a firm’s main bank into different types of securitisation activity influences credit supply before and during the 2007-8 financial crisis. The authors find that, in general, a relationship with a bank that is more involved in securitisation activities relaxes credit constraints in normal periods. In contrast, while a relationship with a firm’s main bank that issues covered bonds reduces credit rationing during crisis periods, the issuance of asset-backed securities by a firm’s main bank aggravates these firms' credit rationing in crisis periods.
Ugo Albertazzi, Leonardo Gambacorta, Carmelo Salleo, 25 May 2011
Before the global crisis, securitisation was hailed as a major breakthrough for the safe functioning of financial markets. Now it is suffering from seriously bad public relations. This column presents evidence from 50 Italian banks between 1995 and 2006 and argues that securitisation, by itself, does not deserve such a nasty reputation.
Ricardo Caballero, 21 May 2010
Are policymakers on track to prevent a repeat global crisis? This column says the answer is probably “no”. It argues that the current financial reform efforts are mostly aimed at the symptoms rather than the underlying illness. The fundamental problem in the current global macroeconomic and financial equilibrium is one of a shortage of safe assets.
Hyun Song Shin, 04 September 2009
Hyun Song Shin of Princeton University talks to Romesh Vaitilingam about the role of securitisation, mark-to-market accounting and banks’ incentives in the current financial crisis, making an analogy between the feedback mechanisms that made London’s Millennium Bridge wobble dramatically when it was first opened and those that operate within the modern financial system. The interview was recorded in Princeton in August 2009.
Mathias Hoffmann, Thomas Nitschka, 20 June 2009
Mortgage-backed securities have played a major role in the financial crisis and aren’t very popular as a result. This column documents macroeconomic benefits of these instruments, showing that economies with more developed markets for securitised mortgage debt share more consumption risk with other economies.
Con Keating, 02 June 2009
The desire to regulate to avoid repeating this financial crisis is commendable, but this column says that the haste with which new regulations are being promulgated is unnecessary and dangerous. Precursory analysis that is incomplete, incorrect, or inadequate creates substantial potential for unintended consequences. We should take the time to appropriately analyse, design, and implement new regulation.
Hyun Song Shin, 18 March 2009
Did securitisation disperse risks? This column argues that it undermined financial stability by concentrating risk. Securitisation allowed banks to leverage up in tranquil times while concentrating risks in the banking system by inducing banks and other financial intermediaries to buy each other’s securities with borrowed money.
Esther Duflo, 06 March 2009
This column warns against bank nationalisation without state control. Bankers will not hesitate to enrich themselves at the expense of the public good if they have the opportunity.
Edward Kane, 02 March 2009
CEPR Policy Insight No. 32 attributes the ongoing financial crisis to the economic and political difficulties of monitoring and controlling the production and distribution of safety-net subsidies.
Edward Kane, 03 March 2009
This column introduces Edward J. Kane’s new Policy Insight on the incentive roots of the securitisation crisis
Sean Chu, Patrick Bajari, Minjung Park, 02 February 2009
This column presents empirical evidence identifying the factors triggering mortgage defaults in the US. Both deterioration of borrowers’ net equity and liquidity constraints have been important. Policy remedies will have to address both concerns – the authors recommend write-downs on loan principal amounts as one such measure.