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The Basel Accords and the Rise of Securitization

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Abstract:

Banks in the U.S. traditionally made loans and then held them in a portfolio. Since profits slowly accrued as those loans were paid off, bankers were careful to make sure those loans were financially sound. Securitization changed all of this. Banks used securitization to pool loans and then issue bonds against the pool. As they came to rely on this for profits, their incentives shifted from creating safe long-term investments to generating as many new loans as possible, regardless of quality. Organizational theorists have argued banks began to act like brokers who relied on fees, rather than traditional bankers who made profits by owning reliable loans. The subsequent erosion in lending standards in the U.S. propelled a massive housing bubble that caused a global economic meltdown.
This paper focuses on the role that the Basel Accords, an international framework for banking regulations, played at the close of the 1980s. Some have argued that banks adopted securitization because it allowed them to free-up capital reserves under the Bank for International Settlements’ guidelines. This paper argues that attending to Basel’s ramifications for capital reserves illuminates an important point: U.S. banks never stopped investing in loans – they just held smaller capital reserves for the loans they owned. In other words, the key point is not that banks stopped being banks, but that they become under-capitalized, highly-leveraged banks. Reflecting on this, I draw conclusions for the relationship between international regulations, American banks, and the global economic crisis.
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Association:
Name: Seventeenth International Conference of the Council for European Studies
URL:
http://www.ces.columbia.edu


Citation:
URL: http://citation.allacademic.com/meta/p402152_index.html
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MLA Citation:

Quinn, Sarah. "The Basel Accords and the Rise of Securitization" Paper presented at the annual meeting of the Seventeenth International Conference of the Council for European Studies, Grand Plaza, Montreal, Canada, <Not Available>. 2014-11-27 <http://citation.allacademic.com/meta/p402152_index.html>

APA Citation:

Quinn, S. "The Basel Accords and the Rise of Securitization" Paper presented at the annual meeting of the Seventeenth International Conference of the Council for European Studies, Grand Plaza, Montreal, Canada <Not Available>. 2014-11-27 from http://citation.allacademic.com/meta/p402152_index.html

Publication Type: Conference Paper/Unpublished Manuscript
Abstract: Banks in the U.S. traditionally made loans and then held them in a portfolio. Since profits slowly accrued as those loans were paid off, bankers were careful to make sure those loans were financially sound. Securitization changed all of this. Banks used securitization to pool loans and then issue bonds against the pool. As they came to rely on this for profits, their incentives shifted from creating safe long-term investments to generating as many new loans as possible, regardless of quality. Organizational theorists have argued banks began to act like brokers who relied on fees, rather than traditional bankers who made profits by owning reliable loans. The subsequent erosion in lending standards in the U.S. propelled a massive housing bubble that caused a global economic meltdown.
This paper focuses on the role that the Basel Accords, an international framework for banking regulations, played at the close of the 1980s. Some have argued that banks adopted securitization because it allowed them to free-up capital reserves under the Bank for International Settlements’ guidelines. This paper argues that attending to Basel’s ramifications for capital reserves illuminates an important point: U.S. banks never stopped investing in loans – they just held smaller capital reserves for the loans they owned. In other words, the key point is not that banks stopped being banks, but that they become under-capitalized, highly-leveraged banks. Reflecting on this, I draw conclusions for the relationship between international regulations, American banks, and the global economic crisis.


Similar Titles:
The Regulation of Global Banking: Shifts in Governance under the Basel Accords

Better than Nothing? Financial Crisis, Unforeseen Circumstances and the Basel Capital Accord


 
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