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The 2007 Meltdown in Structured Securitization: Searching for Lessons, not Scapegoats

  • Gerard Caprio
  • Asli Demirgüç-Kunt
  • Edward J. Kane

The intensity of the crisis in financial markets has surprised nearly everyone. The authors search 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, trends in globalization, and deregulation in financial markets. The authors' analysis finds disturbing implications of the crisis for Basel II and its implementation. They conclude by drawing out lessons for developing countries and identifying reforms that would improve incentives by increasing transparency and accountability in government and industry alike. Copyright 2010, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/wbro/lkp029
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Article provided by World Bank Group in its journal The World Bank Research Observer.

Volume (Year): 25 (2010)
Issue (Month): 1 (February)
Pages: 125-155

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Handle: RePEc:oup:wbrobs:v:25:y:2010:i:1:p:125-155
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  1. Dell’Ariccia, G. & Igan, D. & Laeven, L., 2009. "Credit Booms and Lending Standards : Evidence from the Subprime Mortgage Market," Discussion Paper 2009-46 S, Tilburg University, Center for Economic Research.
  2. Charles W. Calomiris & Charles M. Kahn, 1996. "The Efficiency of Self-Regulated Payments Systems: Learning From the Suffolk System," NBER Working Papers 5442, National Bureau of Economic Research, Inc.
  3. Adam B. Ashcraft & Til Schuermann, 2008. "Understanding the securitization of subprime mortgage credit," Staff Reports 318, Federal Reserve Bank of New York.
  4. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt and bank capital reform," Working Paper 2000-24, Federal Reserve Bank of Atlanta.
  5. Gerard Caprio & Patrick Honohan, 2008. "Banking Crises," Department of Economics Working Papers 2008-07, Department of Economics, Williams College.
  6. 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, vol. 125(1), pages 307-362, February.
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