This paragraph has an idea I hadn’t heard before

by on May 19, 2009 at 4:06 am in Economics | Permalink

What sweet words those are.  Here is the paragraph, from The Economist:

Matt King, an analyst at Citigroup, believes that the surge in
securitisation during the bubble can partly be explained by a massive
mismatch between the regulatory regimes of American and European banks.
Those American banks whose regulator imposed a leverage ratio had an
incentive to move assets off their balance-sheets. European banks which
operated only under a risk-weighted capital regime were able to buy
those very same assets because they attracted a low capital charge.
With risk weightings on the rise, and leverage ratios all the rage, the
capacity of European banks to purchase these assets is shrinking.

The broader question is to what extent the securitization model will make a comeback anytime soon.

Addendum: Arnold Kling comments.

1 hi tech May 19, 2009 at 4:50 am

To appreciate the important role that high technology plays in modern litigation, consider what’s required to produce 27 million pages of discovery documents. And one of these is technology in genetics. The hi tech industry has been one of the best blue chip employers over the last decade or two. However, it’s been hit hard by the recession, and a lot of people lot their jobs. To the hi tech job seeker, you have to look great on paper, and make sure your resume is up to date – it’s worth a short term installment loan to do whatever you can to make your application look good to employers, even if it’s writing code for Webkinz, the kids version of the Sims featuring stuffed animals instead of people. Even the hi tech industry needs a little debt relief these days.

2 ericf May 19, 2009 at 7:45 am

It doesn’t work. Banks don’t mindlessly run their capital to some regulatory constraint any more than builders build everything to code regardless of what their experience and the market encourages. You save on regulatory capital when you believe it is excessive, that is key. Further, the US has three leverage ratios, two risk-weighted.

3 Jeffrey Friedman May 19, 2009 at 3:13 pm

Help me out, readers. I’ve just edited a special issue of Critical Review on the causes of the financial crisis with papers by, among others, Acemoglu, Bhide, Stiglitz, and Taylor. Two of the papers go into the fact that Basel I, as implemented in the US by the American financial regulators, gave favorable (20 percent) risk weights to AA and AAA rated asset-backed securities, as well as GSE-issued ABS. However, as far as we can tell this was not true in any European country (but it was in Canada) until Basel II, which only took effect in 2007. So I don’t understand the Economist passage….And I’m hoping I don’t have to stop the presses!

Jeffrey Friedman
Editor, Critical Review

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12 Aruve October 15, 2010 at 2:36 pm

I guess the real question is how much time the banks give the funds to come into compliance with the new margin requirements.

I could see how a bank would figure that phasing the new limits in would kill a fund just as surely as if they did it all at once, but that it would hopefully minimize the inevitable loses.

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