Securitization and regulatory arbitrage within the ABCT framework
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- Giménez Roche, G.A. & Lermyte, J. Rev Austrian Econ (2016) 29: 67. doi:10.1007/s11138-015-0317-9
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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.