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Can Securitization Work? Economic, Structural and Policy Considerations

  • Timothy J. Riddiough

    (University of Wisconsin - Madison and Hong Kong Institute for Monetary Research)

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    Structured asset securitization is capable of generating a number of economic benefits, including liquidity provision, an increased ability to manage risk, and value enhancement through the pooling and partitioning of cash flows. But the recent financial crisis has exposed numerous structural flaws, which has led many observers to question whether asset- and mortgage-backed securities should be classified as financial "weapons of mass destruction" that require strict containment and possibly even elimination. This paper considers the fundamental economic tradeoffs associated with securitization, with an eye towards policy development, concluding that asset securitization can work. Whether it actually will work depends on how policymakers respond to the significant challenges of reregulating the financial system. Finally, the specific case of securitization in China is considered in the context of institutional and political realities.

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    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 242011.

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    Length: 30 pages
    Date of creation: Aug 2011
    Date of revision:
    Handle: RePEc:hkm:wpaper:242011
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    1. repec:tpr:qjecon:v:113:y:1998:i:3:p:733-771 is not listed on IDEAS
    2. Riddiough, Timothy J., 1997. "Optimal Design and Governance of Asset-Backed Securities," Journal of Financial Intermediation, Elsevier, vol. 6(2), pages 121-152, April.
    3. Reinhart, Carmen, 2009. "The Second Great Contraction," MPRA Paper 21485, University Library of Munich, Germany.
    4. Rene M. Stulz, 2010. "Credit Default Swaps and the Credit Crisis," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 73-92, Winter.
    5. Darrell Duffie, 2010. "The failure mechanics of dealer banks," BIS Working Papers 301, Bank for International Settlements.
    6. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Financial Innovation and Financial Fragility," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
    7. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 733-771.
    8. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," CRSP working papers 339, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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