The 2007 Meltdown in Structured Securitization: Searching for Lessons not Scapegoats
AbstractThe intensity of recent turbulence in financial markets has surprised nearly everyone. This paper searches out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to divert attention from the underlying breakdown of incentives. Incentive conflicts explain how securitization went wrong, why credit ratings proved so inaccurate, and why it is superficial to blame the crisis on mark-to-market accounting, an unexpected loss of liquidity or trends in globalization and deregulation in financial markets. Our analysis finds disturbing implications of the crisis for Basel II and its implementation. We argue that the principal source of financial instability lies in contradictory political and bureaucratic incentives that undermine the effectiveness of financial regulation and supervision in every country in the world. We conclude the paper by identifying reforms that would improve incentives by increasing transparency and accountability in government and industry alike.
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Bibliographic InfoPaper provided by Department of Economics, Williams College in its series Center for Development Economics with number 2008-03.
Length: 60 pages
Date of creation: Sep 2008
Date of revision:
Publication status: published in World Bank Research Observer, February 2010, v. 25, iss. 1, pp. 125-55.
Other versions of this item:
- Gerard Caprio & Asli Demirgüç-Kunt & Edward J. Kane, 2010. "The 2007 Meltdown in Structured Securitization: Searching for Lessons, not Scapegoats," World Bank Research Observer, World Bank Group, vol. 25(1), pages 125-155, February.
- Caprio, Gerard, Jr. & Demirguc-Kunt, Asli & Kane, Edward J., 2008. "The 2007 meltdown in structured securitization : searching for lessons, not scapegoats," Policy Research Working Paper Series 4756, The World Bank.
- Gerard Caprio & Asli Demirgüç-Kunt & Edward Kane, 2008. "The 2007 Meltdown in Structured Securitization: Searching for Lessons not Scapegoats," Department of Economics Working Papers 2008-08, Department of Economics, Williams College.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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