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The future of securitization

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  • Franke, Günter
  • Krahnen, Jan Pieter

Abstract

Securitization is a financial innovation that experiences a boom-bust cycle, as many other innovations before. This paper analyzes possible reasons for the breakdown of primary and secondary securitization markets, and argues that misaligned incentives along the value chain are the primary cause of the problems. The illiquidity of asset and interbank markets, in this view, is a market failure derived from ill-designed mechanisms of coordinating financial intermediaries and investors. Thus, illiquidity is closely related to the design of the financial chains. Our policy conclusions emphasize crisis prevention rather than crisis management, and the objective is to restore a 'comprehensive incentive alignment'. The toe-hold for strengthening regulation is surprisingly small. First, we emphasize the importance of equity piece retention for the long-term quality of the underlying asset pool. As a consequence, equity piece allocation needs to be publicly known, alleviating market pricing. Second, on a micro level, accountability of managers can be improved by compensation packages aiming at long term incentives, and penalizing policies with destabilizing effects on financial markets. Third, on a macro level, increased transparency relating to effective risk transfer, risk-related management compensation, and credible measurement of rating performance stabilizes the valuation of financial assets and, hence, improves the solvency of financial intermediaries. Fourth, financial intermediaries, whose risk is opaque, may be subjected to higher capital requirements. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/31.

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Date of creation: 2008
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Handle: RePEc:zbw:cfswop:200831

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Related research

Keywords: Financial Crisis 2007/08; Bank Regulation; First Loss Position; Rating Process; Securitization; Transparency;

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References

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Citations

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Cited by:
  1. Kara, Alper & Marqués-Ibáñez, David & Ongena, Steven, 2011. "Securitization and lending standards: evidence from the wholesale loan market," Working Paper Series, European Central Bank 1362, European Central Bank.
  2. Camille Cornand & Céline Gimet, 2011. "The 2007-2008 financial crisis : Is there evidence of disaster myopia ?," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 1125, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  3. Günter Franke & Jan P. Krahnen, 2009. "Instabile Finanzmärkte," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, Verein für Socialpolitik, vol. 10(4), pages 335-366, November.
  4. Roman Inderst & Sebastian Pfeil, 2013. "Securitization and Compensation in Financial Institutions," Review of Finance, European Finance Association, European Finance Association, vol. 17(4), pages 1323-1364.
  5. Ahn, Jung-Hyun & Breton, Régis, 2014. "Securitization, competition and monitoring," Journal of Banking & Finance, Elsevier, Elsevier, vol. 40(C), pages 195-210.
  6. Helmut Gründl & Thomas Post, 2009. "Transparency through Financial Claims with Fingerprints – A Free Market Mechanism for Preventing Mortgage Securitization Induced Financial Crises," SFB 649 Discussion Papers SFB649DP2009-018, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  7. Gregory Connor & Thomas Flavin & Brian O’Kelly, 2010. "The U.S. and Irish Credit Crises: Their Distinctive Differences and Common Features," Economics, Finance and Accounting Department Working Paper Series, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth n206-10.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  8. Riachi, Ilham & Schwienbacher, Armin, 2013. "Securitization of corporate assets and executive compensation," Journal of Corporate Finance, Elsevier, Elsevier, vol. 21(C), pages 235-251.
  9. Bobek, Andreas & Bohm, Thomas & Neuner, Stefan & Paintner, Sandra & Schmeußer, Stefanie & Waldvogel, Felix, 2011. "Ökonomische Analyse europäischer Bankenregulierung: Verbriefung und Interbankenmarkt im Fokus," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2011-01, University of Bayreuth, Chair of Finance and Banking.
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  11. Breitenfellner, Bastian & Wagner, Niklas, 2010. "Government intervention in response to the subprime financial crisis: The good into the pot, the bad into the crop," International Review of Financial Analysis, Elsevier, Elsevier, vol. 19(4), pages 289-297, September.
  12. Gann, Philipp, 2009. "Liquidität, Risikoeinstellung des Kapitalmarktes und Konjunkturerwartung als Preisdeterminanten von Collateralized Debt Obligations (CDOs) - Eine simulationsgestützte Analyse," Discussion Papers in Business Administration, University of Munich, Munich School of Management 10582, University of Munich, Munich School of Management.
  13. Ingo Fender & Janet Mitchell, 2009. "The future of securitisation: how to align incentives," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.

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