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Asset price, asset securitization and financial stability

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  • Liu, Luke
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Abstract

Prior to the Global Financial Crisis in 2008, securitization has been widely perceived as a way to disperse credit risks, and to enhance financial system’s capacity in dealing with defaults. This paper develops a model of securitization and financial stability in the form of amplification effects. This model has illustrated three different scenarios: A negative shock in the economy will lead to downturn of the economy and falling of the asset prices, deteriorating balance sheets and tightening financing conditions. However, if there is no shock or a positive shock, banks can improve its profitability significantly through securitization. While securitization decreases the probability of systemic crisis, banks tend to suffer more when the crisis happens as a result of over-borrowing and over-investing. This paper uses a three-period theoretical model to demonstrate the impact of securitization on the financial stability, and provides clear analytical guidelines for a new regulatory framework of securitization that account for systemic risk and systemic externalities.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35000.

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Date of creation: 09 Jul 2011
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Handle: RePEc:pra:mprapa:35000

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Keywords: Asset Price; Asset Securitization; Systemic Risk; Financial Stability;

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  1. Franklin Allen & Douglas Gale, 1995. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 95-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Rochet, Jean Charles & Vives, Xavier, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3233, C.E.P.R. Discussion Papers.
  3. Urban Jermann & Vincenzo Quadrini, 2006. "Financial Innovations and Macroeconomic Volatility," NBER Working Papers, National Bureau of Economic Research, Inc 12308, National Bureau of Economic Research, Inc.
  4. Junfeng Qiu, 2011. "Bank money, aggregate liquidity, and asset prices," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 12(2), pages 295-346, November.
  5. Prasanna Gai & Peter Kondor & Nicholas Vause, 2006. "Procyclicality, collateral values and financial stability," Bank of England working papers, Bank of England 304, Bank of England.
  6. Andrei Shleifer & Robert W. Vishny, 2009. "Unstable Banking," NBER Working Papers, National Bureau of Economic Research, Inc 14943, National Bureau of Economic Research, Inc.
  7. Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 44, pages 367-384, 03.
  8. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports, Federal Reserve Bank of New York 338, Federal Reserve Bank of New York.
  9. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 307-362, February.
  10. Germana Corrado, 2005. "Liquidity Shocks, Banking System Failures, and Supranational Lending of Last Resort Facilities," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 6(1), pages 1-24, May.
  11. Korinek, Anton, 2011. "Systemic risk-taking: amplification effects, externalities, and regulatory responses," Working Paper Series, European Central Bank 1345, European Central Bank.
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