Subprime borrowers, securitization and the transmission of business cycles

Arbeitspapier

A growing literature (i.e. Jaffee, Lynch, Richardson, and Van Nieuwerburgh, 2009, Acharya and Schnabl, 2009) argues that securitization improves financial stability if the securitized assets are held by capital market participants, rather than financial intermediaries. I construct a quantitative macroeconomic model with a novel specification for mortgage-backed securities (MBS) to evaluate this claim for subprime securitization during the Great Recession. I find that output in the U.S. would have dropped by only about a third and house prices by only a half of what we actually observed, if subprime MBS had been purchased by non-financial agents, rather than held by banks. This is because banks are subject to capital requirements and if MBS remain within the banking system, the fall in their value puts a strain on banks' balance sheets. The subsequent deleveraging amplifies business cycles. My findings suggest that the existence of the securitization market stabilizes the economy under the condition that financial intermediaries do not engage in the acquisition of securitized assets.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Sveriges Riksbank Working Paper Series ; No. 317

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Financial Markets and the Macroeconomy ; Financial Crises ; Contingent Pricing; Futures Pricing; option pricing ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
• Subject: Subprime Borrowers ; Securitization ; Financial Intermediation ; Great Recession

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Grodecka, Anna
• Event: Veröffentlichung
• (who): Sveriges Riksbank
• (where): Stockholm
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/157960
• Last update: 10.03.2025, 11:41 AM CET