The Review of Austrian Economics

, Volume 29, Issue 1, pp 67–84 | Cite as

Securitization and regulatory arbitrage within the ABCT framework

Article
  • 195 Downloads

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.

Keywords

Business cycle Deposit insurance Regulatory arbitrage Refinancing Securitization 

JEL Classification

E32 E58 G01 G18 G21 

References

  1. Acharya, V., & Richardson, M. (2009). Causes of the financial crisis. Critical Review: A Journal of Politics and Society, 21(2–3), 195–210.CrossRefGoogle Scholar
  2. Acharya, V., Schnabl, P., & Suarez, G. (2013). Securitization without risk transfer. Journal of Financial Economics, 107(3), 515–536.CrossRefGoogle Scholar
  3. Altunbas, Y., Gambacorta, L., & Marqués-Ibañez, D. (2009). Securitisation and the bank lending channel. European Economic Review, 53(8), 996–1009.CrossRefGoogle Scholar
  4. Ambrose, B. W., Lacour-Little, M., & Sanders, A. B. (2005). Does regulatory capital arbitrage, reputation, or asymmetric Information drive securitization? Journal of Financial Services Research, 28, 113–133.CrossRefGoogle Scholar
  5. Ashcraft, A., & Schuermann, T. (2008). Understanding the securitization of subprime mortgage credit (No. 318). New York: noW Publishers.Google Scholar
  6. Association for Financial Markets in Europe. (2015). AFME Securitisation Data Report, Fourth Quarter 2014. [Online] Available at: http://www.sifma.org/research/item.aspx?id=8589953866. Accessed 20 April 2015.
  7. Basel Committee on Banking Supervision. (1988). International convergence of capital measurement and capital standards. Basel: BIS.Google Scholar
  8. Basel Committee on Banking Supervision. (2005). International convergence of capital measurement and capital standards: a revised framework. Basel: BIS.Google Scholar
  9. Basel Committee on Banking Supervision. (2011). Basel III: A global regulatory framework for more resilient banks and banking systems. Basel: BIS.Google Scholar
  10. Basel Committee on Banking Supervision. (2013). Basel III: The liquidity coverage ratio and liquidity risk monitoring tools. Basel: BIS.Google Scholar
  11. Basel Committee on Banking Supervision. (2014). Basel III document: Revisions to the securitisation framework. Basel: BIS.Google Scholar
  12. Bernanke, B. S. (2012). Some reflections on the crisis and the policy response. Remarks delivered at the Russell Sage Foundation and Century Foundation Conference on “Rethinking Finance,” New York City. Google Scholar
  13. Bhidé, A. (2009). An accident waiting to happen. Critical Review: A Journal of Politics and Society, 21(2–3), 211–247.CrossRefGoogle Scholar
  14. Borio, C., & Disyatat, P. (2010). Unconventional monetary policies: an appraisal. The Manchester School, 78(S1), 53–89.CrossRefGoogle Scholar
  15. Caprio, G., Demigürç-Kunt, A., & Kane, E. J. (2010). The 2007 meltdown in structured securitization searching for lessons not scapegoats. World Bank Research Observer, 25, 125–155.CrossRefGoogle Scholar
  16. Dell’Ariccia, G., Igan, D., & Laeven, L. (2012). Credit boom and lending standards: evidence from the subprime mortgage market. Journal of Money, Credit and Banking, 44(2–3), 367–384.CrossRefGoogle Scholar
  17. Estrella, A. (2002). Securitization and the efficacy of monetary policy. Economic Policy Review, 8(1), 243–255.Google Scholar
  18. Federal Deposit Insurance Corporation. (2007). Federal Register, 72(235), 69288–69445.Google Scholar
  19. Fleischer, V. (2010). Regulatory arbitrage. Texas Law Review, 89, 227–289.Google Scholar
  20. Friedman, J., & Kraus, W. (2011). Engineering the financial crisis: Systemic risk and the failure of regulation. Philadelphia: University of Pennsylvania Press.CrossRefGoogle Scholar
  21. Friedman, B. M. & Kuttner, K. N. (2010). Implementation of central bank policy: how central banks set interest rates?. National Bureau of Economic Research Working Paper Series, Issue w16165.Google Scholar
  22. Gertchev, N. (2009). Securitization and fractional reserve banking. In J. G. Hülsmann & S. Kinsella (Eds.), Property, freedom, and society: Essays in honor of Hans-Hermann Hoppe (pp. 283–300). Auburn: Ludwig von Mises Institute.Google Scholar
  23. Giménez Roche, G. A. (2015). Entrepreneurial ignition of business cycles: the corporate finance of malinvestment. The Review of Austrian Economics.Google Scholar
  24. Goodhart, C. A. E. (2008). The regulatory response to the financial crisis. Journal of Financial Stability, 4(4), 351–358.CrossRefGoogle Scholar
  25. Gorton, G. (2010). Slapped by the invisible hand: The panic of 2007. Oxford: Oxford University Press.Google Scholar
  26. Huerta de Soto, J. (2006). Money, bank credit, and economic cycles (2nd ed.). Auburn: Ludwig von Mises Institute.Google Scholar
  27. Jablecki, J. (2009). The impact of Basel I capital requirements on bank behaviour and the efficacy of monetary policy. International Journal of Economic Sciences and Applied Research, 2(1), 16–35.Google Scholar
  28. Jablecki, J., & Machaj, M. (2009). The regulated meltdown of 2008. Critical Review: A Journal of Politics and Society, 21(2–3), 301–328.CrossRefGoogle Scholar
  29. Kane, E. J. (2012). The inevitability of shadowy Banking. Atlanta, s.n.Google Scholar
  30. Kindleberger, C. P., & Aliber, R. Z. (2005). Manias, panics, and crashes (5th ed.). Hoboken: Wiley.CrossRefGoogle Scholar
  31. McCulley, P. (2007). Teton reflections. PIMCO Global Central Bank Focus, Issue 2.Google Scholar
  32. Mises, L. V. (1980). The theory of money and credit. Indianapolis: LibertyClassics.Google Scholar
  33. Noeth, B. J., & Sengupta, R. (2011). Is shadow banking really banking? The Regional Economist, 10, 8–13.Google Scholar
  34. Partnoy, F. (1996). Financial derivatives and the costs of regulatory arbitrage. The Journal of Corporation Law, 22, 211–256.Google Scholar
  35. Pozsar, Z., Adrian, T., Ashcraft, A., Boesky, H. (2010). Shadow Banking. s.l.:Staff Report No. 458, Federal Reserve Bank of New York.Google Scholar
  36. Stout, L. A. (1995). Betting the bank: how derivatives trading under conditions of uncertainty can increase risks and erode returns in financial markets. The Journal of Corporation Law, 21, 53–68.Google Scholar
  37. White, L. J. (2009). The credit-rating agencies and the subprime debacle. Critical Review: A Journal of Politics and Society, 21(2–3), 389–399.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Finance, Economics, and Law DepartmentGroupe ESC Troyes en ChampagneTroyesFrance
  2. 2.GRANEM, Faculté de droit, d’économie et de gestionUniversité d’AngersAngersFrance

Personalised recommendations