abhishreshthaa
Abhijeet S
SYSTEMIC RISKS OF SECURITIZATION
1. Capital Adequacy Related Risks
The present stand alone capital adequacy rules are relatively crude for as for certain types of loans the adequacy requirements are largely than the risk they would justify. Securitization of such loans will not create any problem. However, securitization may undermine capital adequacy requirements in other ways especially when a bank issues a limited guarantee o the loans it securitizes.
Banks are sometimes tempted to securitize their best loans for some reason while maintaining those of lesser qualities. Then the capital adequacy requirements in banks will consequently decline relative to actual risks, though accompanied by an apparent mechanical improvement in the prudential ratios.
2. Monetary Policy Efficacy Related Risks
The key assumption of the bank lending channel approach is that “banks cannot easily replace lost (retail) deposits with other sources of funds, such as Certificate of Deposit or new equity issues.” Since securitization is an innovation in sources of funding, the strength of this approach gets diluted.
In the sense that securitisation could reduce the proportion of financial assets and liabilities held by banks, this could render more difficult the execution of monetary policy in countries where central banks operate through variable minimum reserve requirements.
Since Monetary policy acts most directly through the banking system, change in the structure of that system will likely to affect policy as well. A decline in the importance of banks could also weaken the relationship between lenders and borrowers, particularly in countries where banks are predominant in the economy.
1. Capital Adequacy Related Risks
The present stand alone capital adequacy rules are relatively crude for as for certain types of loans the adequacy requirements are largely than the risk they would justify. Securitization of such loans will not create any problem. However, securitization may undermine capital adequacy requirements in other ways especially when a bank issues a limited guarantee o the loans it securitizes.
Banks are sometimes tempted to securitize their best loans for some reason while maintaining those of lesser qualities. Then the capital adequacy requirements in banks will consequently decline relative to actual risks, though accompanied by an apparent mechanical improvement in the prudential ratios.
2. Monetary Policy Efficacy Related Risks
The key assumption of the bank lending channel approach is that “banks cannot easily replace lost (retail) deposits with other sources of funds, such as Certificate of Deposit or new equity issues.” Since securitization is an innovation in sources of funding, the strength of this approach gets diluted.
In the sense that securitisation could reduce the proportion of financial assets and liabilities held by banks, this could render more difficult the execution of monetary policy in countries where central banks operate through variable minimum reserve requirements.
Since Monetary policy acts most directly through the banking system, change in the structure of that system will likely to affect policy as well. A decline in the importance of banks could also weaken the relationship between lenders and borrowers, particularly in countries where banks are predominant in the economy.