Securitization and regulatory arbitrage within the ABCT framework

Gabriel Giménez Roche and Jason Lermyte ()

The Review of Austrian Economics, 2016, vol. 29, issue 1, 67-84

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. Copyright Springer Science+Business Media New York 2016

Keywords: Business cycle; Deposit insurance; Regulatory arbitrage; Refinancing; Securitization; E32; E58; G01; G18; G21 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s11138-015-0317-9

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