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Can Securitization Work? Economic, Structural and Policy Considerations

Timothy J. Riddiough
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Timothy J. Riddiough: University of Wisconsin - Madison and Hong Kong Institute for Monetary Research

No 242011, Working Papers from Hong Kong Institute for Monetary Research

Abstract: Structured asset securitization is capable of generating a number of economic benefits, including liquidity provision, an increased ability to manage risk, and value enhancement through the pooling and partitioning of cash flows. But the recent financial crisis has exposed numerous structural flaws, which has led many observers to question whether asset- and mortgage-backed securities should be classified as financial "weapons of mass destruction" that require strict containment and possibly even elimination. This paper considers the fundamental economic tradeoffs associated with securitization, with an eye towards policy development, concluding that asset securitization can work. Whether it actually will work depends on how policymakers respond to the significant challenges of reregulating the financial system. Finally, the specific case of securitization in China is considered in the context of institutional and political realities.

Pages: 30 pages
Date: 2011-08
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