2007+Meltdown+-+Kane+et+al

2007+Meltdown+-+Kane+et+al - Paolo Baffi Centre on Central...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Electronic copy available at: http://ssrn.com/abstract=1424352 “Paolo Baffi” Centre on Central Banking and Financial Regulation “Paolo Baffi” Centre Research Paper Series No. 2009-49 The 2007 Meltdown in Structured Securitization: Searching for Lessons not Scapegoats by Gerard Caprio, Jr. Aslı Demirgüç-Kunt and Edward J. Kane This Paper can be downloaded without charge from The Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=1424352
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Electronic copy available at: http://ssrn.com/abstract=1424352 The 2007 Meltdown in Structured Securitization: Searching for Lessons not Scapegoats* Gerard Caprio, Jr. (Williams College) Aslı Demirgüç-Kunt (World Bank) Edward J. Kane (Boston College and NBER) November 23, 2008 Abstract: The intensity of the crisis in financial markets has surprised nearly everyone. This paper searches out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to divert attention from the underlying breakdown of incentives. Incentive conflicts explain how securitization went wrong, why credit ratings proved so inaccurate, and why it is superficial to blame the crisis on mark-to-market accounting, an unexpected loss of liquidity or trends in globalization and deregulation in financial markets. The analysis finds disturbing implications of the crisis for Basel II and its implementation. The paper argues that the principal source of financial instability lies in contradictory political and bureaucratic incentives that undermine the effectiveness of financial regulation and supervision around the world. In concluding the paper identifies reforms that would improve incentives by increasing transparency and accountability in government and industry alike. Keywords: Financial crisis, Securitization, Regulation and Supervision, Safety Nets JEL Classification Codes: G21, G28, G32 * Caprio: Williams College, ( Gerard.caprio@williams.edu ); Demirguc-Kunt: World Bank ( Ademirguckunt @worldbank.org ); Kane: Boston College and NBER ( edward.kane@bc.edu ). We are grateful to Stijn Claessens, Enrica Detragiache, Ramon DeGennaro, Robert Eisenbeis, Alain Ize, Philip Keefer, Joseph Mason, James Moser, Roberto Rocha, Luis Serven, Tressel Thierry, James Thomson and Dimitri Vittas for valuable comments. This paper’s findings, interpretations, and conclusions are entirely those of the authors and do not represent the views of the World Bank, their Executive Directors, or the countries they represent.
Background image of page 2
Electronic copy available at: http://ssrn.com/abstract=1424352 I. Introduction Since August 2007, after a long period of relative quiet in world markets, 1 a spreading financial crisis has nearly monopolized the flow of economic news. Occurring during a period of strong world macroeconomic growth and low interest rates, the crisis appears to have surprised financiers and regulators alike. The turbulence was triggered by a sudden and widespread loss of confidence in securitization and financial engineering and by the
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/02/2011 for the course GEOGRAPHY 101 taught by Professor Vancura during the Spring '08 term at Rutgers.

Page1 / 50

2007+Meltdown+-+Kane+et+al - Paolo Baffi Centre on Central...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online