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Can Securitization Work? Economic, Structural and Policy Considerations

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  • Timothy J. Riddiough

    (University of Wisconsin - Madison and Hong Kong Institute for Monetary Research)

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    Abstract

    Structured asset securitization is capable of generating a number of economic benefits, including liquidity provision, an increased ability to manage risk, and value enhancement through the pooling and partitioning of cash flows. But the recent financial crisis has exposed numerous structural flaws, which has led many observers to question whether asset- and mortgage-backed securities should be classified as financial "weapons of mass destruction" that require strict containment and possibly even elimination. This paper considers the fundamental economic tradeoffs associated with securitization, with an eye towards policy development, concluding that asset securitization can work. Whether it actually will work depends on how policymakers respond to the significant challenges of reregulating the financial system. Finally, the specific case of securitization in China is considered in the context of institutional and political realities.

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    Bibliographic Info

    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 242011.

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    Length: 30 pages
    Date of creation: Aug 2011
    Date of revision:
    Handle: RePEc:hkm:wpaper:242011

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    1. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Financial Innovation and Financial Fragility," Working Papers 2010.114, Fondazione Eni Enrico Mattei.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
    3. Riddiough, Timothy J., 1997. "Optimal Design and Governance of Asset-Backed Securities," Journal of Financial Intermediation, Elsevier, vol. 6(2), pages 121-152, April.
    4. Stulz, Rene M., 2009. "Credit Default Swaps and the Credit Crisis," Working Paper Series 2009-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    5. Stewart C. Myers & Raghuram G. Rajan, 1995. "The Paradox of Liquidity," NBER Working Papers 5143, National Bureau of Economic Research, Inc.
    6. Darrell Duffie, 2010. "The failure mechanics of dealer banks," BIS Working Papers 301, Bank for International Settlements.
    7. Darrell Duffie, 2010. "The Failure Mechanics of Dealer Banks," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 51-72, Winter.
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