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Structured Finance Influence on Financial Market Stability – Evaluation of Current Regulatory Developments

  • Schuetz, Sebastian Alexander
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    In 2007 the world faced one of the biggest financial crises ever. It was the third important financial crisis in the last 12 years. Spillovers to the real economy and moral hazard behaviour of carpetbaggers resulted in enormous pressure on worldwide political institutions to approve a more rigorous regulation on financial institutions and to predict financial crises via early warning systems. We analyzed the performance of structured finance ratings and structured finance issuance/outstanding to detect the main shortcomings of the subprime crisis. Afterwards, we explain the behaviour of market participants with theoretical models and a survey of institutions involved in securitization. With the conclusions of this analysis we evaluate the EU regulation on credit rating agencies and current Basel II enhancements. Finally we can determine that most regulatory enhancements are in accordance with our analyzed shortcomings. Some approaches like the introduction of a leverage ratio are counterproductive and a danger for worldwide economic growth.

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    File URL: http://mpra.ub.uni-muenchen.de/23574/1/MPRA_paper_23574.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23574.

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    Date of creation: 30 Jun 2010
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    Handle: RePEc:pra:mprapa:23574
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    1. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
    2. E. Philip Davis & Dilruba Karim, 2008. "Could Early Warning Systems Have Helped To Predict the Sub-Prime Crisis?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 206(1), pages 35-47, October.
    3. Donato Masciandaro & Maria J. Nieto & Marc Quintyn, 2011. "Will They Sing the Same Tune? Measuring Convergence in the New European System of Financial Supervisors," Chapters, in: Handbook of Central Banking, Financial Regulation and Supervision, chapter 17 Edward Elgar.
    4. Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers 9516, Centro de Estudios Monetarios Y Financieros-.
    5. repec:nsr:niesrd:330 is not listed on IDEAS
    6. Günter Franke, 2004. "Transformation nicht-gehandelter in handelbare Kreditrisiken," CoFE Discussion Paper 04-08, Center of Finance and Econometrics, University of Konstanz.
    7. Agarwal, Sumit & Ambrose, Brent W. & Chomsisengphet, Souphala & Liu, Chunlin, 2006. "An empirical analysis of home equity loan and line performance," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 444-469, October.
    8. E Philip Davis, 1999. "Financial data needs for macroprudential surveillance - What are the key indicators of risks to domestic financial stability?," Lectures, Centre for Central Banking Studies, Bank of England, number 2, November.
    9. Paul S. Mills & John Kiff, 2007. "Money for Nothing and Checks for Free; Recent Developments in U.S. Subprime Mortgage Markets," IMF Working Papers 07/188, International Monetary Fund.
    10. Claudio Borio & Mathias Drehmann, 2009. "Assessing the risk of banking crises - revisited," BIS Quarterly Review, Bank for International Settlements, March.
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