see
shadow banking market
securitization of mortgages
Some innovations in Finance:
financial innovations such as SIV's, collatoralized debt, and asset backed securities. See more in our discussion on alternative investments
Trouble brewing?
In the past decade, there has been a boom (especially in the USA) of structured finance, in which banks offloaded their risk to specialist vehicles such as "conduits". Because they had innovated a way to remove the risk from their own balance sheets, they therefore didnt need to worry as much about the credit worthiness of their borrowers (for homes). But, when the subprime lending crisis broke out, they quickly discovered that the risk was not entirely removed from their company, and that it could come back to bite them. And, bite them it did, with the troubles coming right back to their balance sheets. In this manner, the banks mispriced the credit risk of their customers.
In response to the Credit Crisis of 2007-08
There is a danger that there will be Less financial innovation: Normally…if a segment of our economy were to go into recession, then most analysts would say that they need more innovation. (in the hope that innovation would be the key to pulling that industry out of trouble). But, the exact opposite is happening in the financial industry. Banks, regulators and investors are pulling back from all complex financial innovations. There is the risk that if financial-innovations become out of fashion, then it may become more difficult for companies to transfer risk to third parties. With less tools to transfer risk, there will be less risk taking. With less risk taking, there will be less lending, and a slower economy. By this means, there is the risk that a lack of appetite for financial innovations could lead to a weaker US consumer with less purchasing power.
Major US export (beore the credit crisis)
US debt as an EXPORT...one interesting one is the fact that US financial products (debt, repackaged as securities) has been one of the main US exports.
Prior to 2007, the structured finance innovations from the US were one of the major exports. But, with the confidence of the foreign bankers shaken after the crisis, exports of products such as "securitized mortgages" became a difficult sell. This accounted for a large portion of the depreciation of the US dollar (leading up till Sept '08...when investors ran for "security" of US Treasuries)...
Its interesting that one of the US 's biggest exports in recent years has been the financial innovations such as SIV's, collatoralized debt, and asset backed securities. European banks have been great customers. But, since the housing crisis of 2007, and the ensuing credit crunch, the foreign banks are no longer hungry buyers of US financial innovations. Rather, they are staying away...
will they come back? If not...what will happen to the dollar after "flight-to-Treasuries" passes?
Role of London:
residents in the UK were the largest purchaser of US corporate debt over the past few years. Corporate debt – in the US balance of payments data – includes asset-backed securities. Foreign purchases of such debt soared – especially from 2004 to 2007 – before falling off a cliff during the crisis.
A fraction of central bank dollar reserves were held in deposit in European banks – and another fraction was invested in onshore and offshore dollar-denominated money market funds. European banks used those sources of dollar “funding’ to buy securities backed by loans to US households. The growth in their balance sheets undoubtedly explains the huge increase in cross border flows (outflows from US money market funds financed the inflows associated with European banks purchases of US securities) during the boom years – and large corporate debt purchases through the UK.
read more here: http://blogs.cfr.org/setser/2009/03/08/the-shadow-financial-system-%E2%80%93-as-illustrated-in-three-new-papers-that-cut-through-london%E2%80%99s-fog/#
Links from GloboTrends:
see also:
Comments (0)
You don't have permission to comment on this page.