Securitization and regulatory arbitrage within the ABCT framework

Securitization and regulatory arbitrage within the ABCT framework This paper discusses the consequences of securitization and how it links to the Austrian Business Cycle Theory (ABCT). The argument that securitization is behind fiduciary credit expansion preceding the 2008 crisis is incomplete. Consolidated balance sheet analysis demonstrates that securitization per se actually sterilizes the inflationary effect of previous fiduciary credits by transforming them into credits backed by voluntary savings. This sterilization stage is subsequently followed by new fiduciary credits issuance as securitization creates excess reserves and excess capital for banks. However, when securitization is used as a tool to implement arbitrage strategies of the Basel prudential rules, it enables banks to create more fiduciary credit while time preference remains unchanged. This creates the conditions for business cycle amplification. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Austrian Economics Springer Journals

Securitization and regulatory arbitrage within the ABCT framework

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Publisher
Springer US
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Economics; Public Finance & Economics; Political Science; Methodology/History of Economic Thought
ISSN
0889-3047
eISSN
1573-7128
D.O.I.
10.1007/s11138-015-0317-9
Publisher site
See Article on Publisher Site

Abstract

This paper discusses the consequences of securitization and how it links to the Austrian Business Cycle Theory (ABCT). The argument that securitization is behind fiduciary credit expansion preceding the 2008 crisis is incomplete. Consolidated balance sheet analysis demonstrates that securitization per se actually sterilizes the inflationary effect of previous fiduciary credits by transforming them into credits backed by voluntary savings. This sterilization stage is subsequently followed by new fiduciary credits issuance as securitization creates excess reserves and excess capital for banks. However, when securitization is used as a tool to implement arbitrage strategies of the Basel prudential rules, it enables banks to create more fiduciary credit while time preference remains unchanged. This creates the conditions for business cycle amplification.

Journal

The Review of Austrian EconomicsSpringer Journals

Published: May 30, 2015

References

  • Causes of the financial crisis
    Acharya, V; Richardson, M
  • Securitization without risk transfer
    Acharya, V; Schnabl, P; Suarez, G
  • Does regulatory capital arbitrage, reputation, or asymmetric Information drive securitization?
    Ambrose, BW; Lacour-Little, M; Sanders, AB

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