Presented as the Economic Journal Lecture at the Royal Economic Society Conference in Warwick, March 17-8, 2008. I am grateful to Frank Heinemann, Gara Minguez Afonso, Jean-Charles Rochet and Andrew Scott for their comments on earlier versions and, especially, to Tobias Adrian for allowing me to draw on work from our on-going collaboration.
Securitisation and Financial Stability†
Article first published online: 18 FEB 2009
© The Author(s). Journal compilation © Royal Economic Society 2009
The Economic Journal
Volume 119, Issue 536, pages 309–332, March 2009
How to Cite
Shin, H. S. (2009), Securitisation and Financial Stability. The Economic Journal, 119: 309–332. doi: 10.1111/j.1468-0297.2008.02239.x
- Issue published online: 18 FEB 2009
- Article first published online: 18 FEB 2009
A widespread opinion before the credit crisis of 2007/8 was that securitisation enhances financial stability by dispersing credit risk. After the credit crisis, securitisation was blamed for allowing the ‘hot potato’ of bad loans to be passed to unsuspecting investors. Both views miss the endogeneity of credit supply. Securitisation enables credit expansion through higher leverage of the financial system as a whole. Securitisation by itself may not enhance financial stability if the imperative to expand assets drives down lending standards. The ‘hot potato’ of bad loans sits in the financial system on the balance sheets of large banks rather than being sold on to final investors, since the aim of financial intermediaries is to expand lending in order to utilise slack in balance sheet capacity.