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Structured Finance Influence on Financial Market Stability – Evaluation of Current Regulatory Developments

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  • Schuetz, Sebastian Alexander
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    Abstract

    In 2007 the world faced one of the biggest financial crises ever. It was the third important financial crisis in the last 12 years. Spillovers to the real economy and moral hazard behaviour of carpetbaggers resulted in enormous pressure on worldwide political institutions to approve a more rigorous regulation on financial institutions and to predict financial crises via early warning systems. We analyzed the performance of structured finance ratings and structured finance issuance/outstanding to detect the main shortcomings of the subprime crisis. Afterwards, we explain the behaviour of market participants with theoretical models and a survey of institutions involved in securitization. With the conclusions of this analysis we evaluate the EU regulation on credit rating agencies and current Basel II enhancements. Finally we can determine that most regulatory enhancements are in accordance with our analyzed shortcomings. Some approaches like the introduction of a leverage ratio are counterproductive and a danger for worldwide economic growth.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23574.

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    Date of creation: 30 Jun 2010
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    Handle: RePEc:pra:mprapa:23574

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    Related research

    Keywords: Structured Finance; Ratings; Regulation; Subprime Crisis; Basel II; Leverage Ratio;

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    1. Paul S. Mills & John Kiff, 2007. "Money for Nothing and Checks for Free: Recent Developments in U.S. Subprime Mortgage Markets," IMF Working Papers 07/188, International Monetary Fund.
    2. Ray Barrell & Davis, E. & Liadze, I. & Dilruba Karim, 2009. "Bank Regulation, Property Prices And Early Warning Systems For Banking Crises In Oecd Countries," NIESR Discussion Papers 330, National Institute of Economic and Social Research.
    3. Agarwal, Sumit & Ambrose, Brent W. & Chomsisengphet, Souphala & Liu, Chunlin, 2006. "An empirical analysis of home equity loan and line performance," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 444-469, October.
    4. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers 2634, C.E.P.R. Discussion Papers.
    5. Guenter Franke, 2005. "Transformation nicht-gehandelter in handelbare Kreditrisiken ," TWI Research Paper Series 7, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    6. Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers 9516, Centro de Estudios Monetarios Y Financieros-.
    7. Donato Masciandaro & Marc Quintyn & María Nieto, 2009. "Will they Sing the Same Tune? Measuring Convergence in the new European System of Financial Supervisors," IMF Working Papers 09/142, International Monetary Fund.
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