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Asset price, asset securitization and financial stability

Listed author(s):
  • Liu, Luke
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Prior to the Global Financial Crisis in 2008, securitization has been widely perceived as a way to disperse credit risks, and to enhance financial system’s capacity in dealing with defaults. This paper develops a model of securitization and financial stability in the form of amplification effects. This model has illustrated three different scenarios: A negative shock in the economy will lead to downturn of the economy and falling of the asset prices, deteriorating balance sheets and tightening financing conditions. However, if there is no shock or a positive shock, banks can improve its profitability significantly through securitization. While securitization decreases the probability of systemic crisis, banks tend to suffer more when the crisis happens as a result of over-borrowing and over-investing. This paper uses a three-period theoretical model to demonstrate the impact of securitization on the financial stability, and provides clear analytical guidelines for a new regulatory framework of securitization that account for systemic risk and systemic externalities.

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File URL: https://mpra.ub.uni-muenchen.de/35000/1/MPRA_paper_35000.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35000.

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Date of creation: 09 Jul 2011
Handle: RePEc:pra:mprapa:35000
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  1. Urban J. Jermann & Vincenzo Quadrini, 2006. "Financial innovations and macroeconomic volatility," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  2. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
  3. Anton Korinek, 2011. "Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses," NFI Working Papers 2011-WP-13, Indiana State University, Scott College of Business, Networks Financial Institute.
  4. Allen, Franklin & Gale, Douglas, 1997. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 523-546, June.
  5. Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 367-384, 03.
  6. repec:hrv:faseco:33077921 is not listed on IDEAS
  7. Junfeng Qiu, 2011. "Bank money, aggregate liquidity, and asset prices," Annals of Economics and Finance, Society for AEF, vol. 12(2), pages 295-346, November.
  8. Shleifer, Andrei & Vishny, Robert W., 2010. "Unstable banking," Journal of Financial Economics, Elsevier, vol. 97(3), pages 306-318, September.
  9. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports 338, Federal Reserve Bank of New York.
  10. Prasanna Gai & Peter Kondor & Nicholas Vause, 2006. "Procyclicality, collateral values and financial stability," Bank of England working papers 304, Bank of England.
  11. 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, Oxford University Press, vol. 125(1), pages 307-362.
  12. Germana Corrado, 2005. "Liquidity Shocks, Banking System Failures, and Supranational Lending of Last Resort Facilities," Annals of Economics and Finance, Society for AEF, vol. 6(1), pages 1-24, May.
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