Structured Finance Influence on Financial Market Stability – Evaluation of Current Regulatory Developments

Sebastian Schuetz

No 178, Working Paper Series in Economics from University of Lüneburg, Institute of Economics

Abstract: In 2007 the world faced one of the biggest financial crises ever. It was the third important financial crisis in the last 12 years. Spillovers to the real economy and moral hazard behaviour of carpetbaggers resulted in enormous pressure on worldwide political institutions to approve a more rigorous regulation on financial institutions and predict financial crises via early warning systems. We analyzed the performance of structured finance ratings and structured finance issuance/outstanding to detect the main shortcomings of the subprime crisis. Afterwards we explain the behaviour of market participants with theoretical models and a survey of institutions involved in securitization. With the conclusions of this analysis we evaluate the EU regulation on credit rating agencies and current Basel II enhancements. Finally we can determine that most regulatory enhancements are in accordance with our analyzed shortcomings. Some approaches like the introduction of a leverage ratio are counterproductive and a danger for worldwide economic growth.

Keywords: structured finance; ratings; regulation; subprime crisis; Basel II; leverage ratio (search for similar items in EconPapers)
JEL-codes: G01 G21 G24 G28 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2010-06
New Economics Papers: this item is included in nep-ban and nep-reg
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