The 2007 Meltdown in Structured Securitization : Searching for Lessons, Not Scapegoats

The intensity of recent turbulence in financial markets has surprised nearly everyone. This paper searches out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to divert attention from the underlying breakdown of incentives. Incentive conflicts explain how securitization went wrong, why credit ratings proved so inaccurate, and why it is superficial to blame the crisis on mark-to-market accounting, an unexpected loss of liquidity, or trends in globalization and deregulation in financial markets. The analysis finds disturbing implications of the crisis for Basel II and its implementation. The paper argues that the principal source of financial instability lies in contradictory political and bureaucratic incentives that undermine the effectiveness of financial regulation and supervision in every country in the world. The paper concludes by identifying reforms that would improve incentives by increasing transparency and accountability in government and industry alike.

Bibliographic Details

Main Authors:	Caprio, Gerard, Jr., Demirgüç-Kunt, Aslı, Kane, Edward J.
Language:	English
Published:	Washington, DC: World Bank 2008-10
Subjects:	ACCOUNTABILITY, ACCOUNTING PRINCIPLES, AFFILIATES, AMOUNT OF CAPITAL, ARBITRAGE, ASSET HOLDINGS, ASSET POOL, ASSET PRICES, ASSET QUALITY, ASSET SALES, ASSET VALUES, ASYMMETRIC INFORMATION, AUDITING, BAILOUTS, BALANCE SHEET, BALANCE SHEETS, BANK LOANS, BANK REGULATION, BANK REGULATIONS, BANKING CRISES, BANKING CRISIS, BANKING INDUSTRY, BANKING SYSTEM, BARRIERS TO ENTRY, BID, BOND ISSUE, BOND ISSUES, BONDS, BOOK VALUE, BORROWER, BUSINESS CYCLE, CAPITAL ADEQUACY, CAPITAL REGULATION, CAPITAL REQUIREMENTS, CAPITAL SHORTAGE, CASH FLOWS, CDS, CENTRAL BANK, CENTRAL BANKS, COLLATERAL, COMMERCIAL BANKS, COMMERCIAL PAPER, CONFLICT OF INTEREST, CONFLICTS OF INTEREST, CORPORATE BONDS, CORPORATE DEFAULT, CORPORATE GOVERNANCE, CORPORATE STOCK, CREDIBILITY, CREDIT DEFAULT, CREDIT DEFAULT SWAPS, CREDIT ENHANCEMENTS, CREDIT LINES, CREDIT QUALITY, CREDIT RATING, CREDIT RATINGS, CREDIT RISK, CREDIT RISKS, CREDIT SPREAD, CREDIT SPREADS, CREDIT STANDING, CREDIT SYSTEMS, CREDITORS, CREDITWORTHINESS, DEBT, DEBT CRISIS, DEBT OBLIGATION, DEBTS, DEFAULT PROBABILITIES, DEFAULT RATE, DEFAULT RATES, DEFAULTS, DEPOSIT, DEPOSIT INSURANCE, DEPOSIT INTEREST, DEPOSITORS, DEPOSITORY INSTITUTION, DEPOSITS, DERIVATIVE, DERIVATIVE INSTRUMENTS, DERIVATIVES, DEVELOPING COUNTRIES, DISBURSEMENT, DUE DILIGENCE, EARNING POWER, ENFORCEMENT SYSTEMS, EQUITY CAPITAL, EQUITY VALUE, EXCHANGE COMMISSION, EXTERNAL CREDIT RATINGS, FACE VALUE, FEDERAL NATIONAL MORTGAGE ASSOCIATION, FEDERAL RESERVE, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL FRAGILITY, FINANCIAL HISTORY, FINANCIAL INSTABILITY, FINANCIAL INSTITUTION, FINANCIAL INSTITUTIONS, FINANCIAL INSTRUMENTS, FINANCIAL MARKETS, FINANCIAL REGULATION, FINANCIAL SAFETY NETS, FINANCIAL STABILITY, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FOREIGN EXCHANGE, FOREIGN EXCHANGE RISK, FOREIGN MARKETS, FORMS OF DEBT, FUND MANAGERS, GLOBAL MARKETS, GLOBALIZATION, HEDGE FUND, HEDGE FUND MANAGERS, HEDGE FUNDS, HOLDINGS, HOME LOAN, HOME OWNERSHIP, HOST COUNTRIES, HOUSING, HOUSING PRICES, ILLIQUIDITY, IMPLICIT SUBSIDIES, INDIVIDUAL BOND, INDIVIDUAL LOANS, INFLATION, INFORMATION SYSTEM, INFORMATION SYSTEMS, INSURANCE, INSURANCE COMPANIES, INSURANCE COMPANY, INTANGIBLE, INTEREST RATE, INTEREST RATES, INTEREST-RATE RISK, INTERNATIONAL BANK, INTERNATIONAL FINANCE, INVESTING, INVESTMENT BANK, INVESTMENT BANKING, INVESTMENT BANKS, INVESTMENT STRATEGY, INVESTMENT VEHICLE, INVESTOR LOSS, INVESTOR RETURNS, ISSUANCE, LENDER, LENDERS, LINES OF CREDIT, LIQUIDITY, LIQUIDITY CRISIS, LIQUIDITY PROBLEM, LIQUIDITY RISK, LOAN APPLICATIONS, LOAN MARKETS, LOAN OFFICERS, LOAN PORTFOLIO, LOAN QUALITY, LONG-TERM INTEREST, LOSS OF CONFIDENCE, MARK-TO-MARKET, MARK-TO-MARKET ACCOUNTING, MARKET DISCIPLINE, MARKET FOR CREDIT, MARKET INTEREST RATES, MARKET LIQUIDITY, MARKET OVERSIGHT, MARKET PARTICIPANTS, MARKET PRACTICES, MARKET RISK, MARKET RISKS, MARKET STRUCTURE, MARKET VALUES, MATURITIES, MATURITY, MATURITY TRANSFORMATION, MINIMUM CAPITAL REQUIREMENTS, MONETARY POLICY, MORTGAGE, MORTGAGES, MUNICIPALITIES, NEW ENTRANTS, OIL PRICES, OLIGOPOLISTIC MARKET, OUTPUT LOSS, PENSION, PENSION FUNDS, PORTFOLIO, PORTFOLIOS, PRIVATE PARTIES, PROBABILITY OF DEFAULT, PRUDENTIAL REGULATION, PRUDENTIAL SUPERVISION, REGULATORY FORBEARANCE, REGULATORY STANDARDS, REGULATORY SYSTEMS, RESERVES, RETURN, RISK CONTROLS, RISK EXPOSURE, RISK EXPOSURES, RISK MANAGEMENT, RISK PREMIUMS, RISKY LOANS, SAFETY NET, SAFETY NETS, SECURITIES, SHAREHOLDER, SHAREHOLDER EQUITY, SHAREHOLDERS, SHORT-TERM DEBT, SIMPLE BOND, STOCK OPTIONS, STUDENT LOANS, SUBORDINATED DEBT, SUPERVISORY AUTHORITIES, SUPERVISORY AUTHORITY, TAX, TRADING, TRANCHE, TRANCHES, TRANSACTION, TRANSACTION COSTS, TRANSFER RISK, TRANSPARENCY, UNDERLYING ASSET, UNDERLYING ASSETS, UNDERLYING MORTGAGES, VALUATION, VALUATIONS, WAREHOUSE, WRITEDOWNS,
Online Access:	http://documents.worldbank.org/curated/en/2008/11/10053071/2007-meltdown-structured-securitization-searching-lessons-not-scapegoats https://hdl.handle.net/10986/6309
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