Handbook of Critical Issues in Finance

Handbook of Critical Issues in Finance

Elgar original reference

Edited by Jan Toporowski and Jo Michell

This vital new Handbook is an authoritative volume presenting key issues in finance that have been widely discussed in the financial markets but have been neglected in textbooks and the usual compilations of conventional academic wisdom.

Chapter 40: Securitization

Sanjay Krishnan

Subjects: economics and finance, financial economics and regulation, post-keynesian economics


There is a parallel between the development of economic theory and that of financial developments. By itself, securitization is a neutral asset–liability management tool that is not to be feared. The incentives for seemingly unlimited profit exploitation are what lights the fuse. This also means that unless the rules of the game are changed worldwide such that they alter or reduce the current set of incentives, when the debris of the current crisis settles, securitization will still be around – which, just to clarify, is of neutral consequence. INCENTIVES IN SECURITIZATION – A VICIOUS CIRCLE Banks used the low interest rates, a result of the savings surplus from Asian countries, to lend liberally to subprime borrowers and with limited checks on the borrower’s ability to repay. Banks used securitization to raise significant amounts of cash, which were then ploughed back into giving out more loans.

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