Securitization and Bank Liquidity

Paper Summary:

The paper explores the use of securitization in the banking industry and the problems banks have regarding mortgages and recovering their money. The paper first examines the research on the Federal Reserve's role and then highlights how accountability has been a vital issue in the subprime housing mortgage industry. Next, the paper explains how the subprime crisis has brought to the light four flaws in the practice of securitization. The paper concludes that securitization and bank liquidity, while having been historically and traditionally utilized and considered to be acceptable, have resulted in a crisis stated by many to appear to be as strong as that of the Roaring 1920s leading into the Great Depression. The paper includes numerous graphs.

Outline:
Objective
Definitions and Terms of the Study
Introduction
International Monetary Fund
The Federal Reserve and the Testimony of Kohn
Banking Lessons
Creation of Banking Liquidity
Securitization and the Impact to Bank Lending
Securitization and Monetary Policy
Conclusion

From the Paper:

"Securitization activity is stated by Altunbas, Gambacorta and Marques to have enabled banks in their capacity in supplying new loans to households and firms for a given amount of funding." (2007) It is noted however, that changes may occur in this capacity depending upon conditions of the business cycle. During times of economic expansion characterized by little uncertainty in the view of investors of structured project evaluation. The definition applied to 'securitization' in the work of Altunbas, Gambacorta and Marques is that securitization "can be defined, in a broad way, as the process whereby individual bank loans and other financial assets are bundled together into tradable securities that are sold to the secondary market." (2007)The question is asked in the work of Altunbas, Gambacorta and Marques of "how does securitization affect the monetary transmission mechanism?" (2007)"

Sample of Sources Used:

• Altunbas, Yener; Gambacorta, Leonardo; and Marques, David (2007) Securitization and the Bank Leading Channel. Working Paper Series, No. 838 December 23007. European Central Bank.
• Altunbas Y., de Bondt G. and Marques D. (2004), "Bank Capital, Bank Lending andMonetary Policy in the euro area", Kredit und Kapital, Vol. 4, pp. 443-465.
• Angeloni I., Mojon B. and Kashyap A. (2003), "Monetary policy transmission in the Euroarea", Cambridge University Press.
• Arellano M. and Bond S. (1991), "Some Tests of Specification for Panel Data: Monte CarloEvidence and an Application to Employment Equations", Review of Economic Studies,Vol. 58, pp. 277-97.
• Ashcraft A.B. (2006), "New Evidence on the Lending Channel", Journal of Money, Creditand Banking, Vol. 38, No. 3, pp. 751-775.

More papers on Securitization and Bank Liquidity:

• Dissertation or Thesis # 116410 : "The Financial Crisis and Germany"
• Comparison Essay # 120363 : "The Federal Reserve and Bank Holding Companies"
• Analytical Essay # 142337 : "Central Bank Lending and Banking Risk"

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