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

51 Pages Posted: 20 Apr 2016

See all articles by Gerard Caprio

Gerard Caprio

Williams College

Asli Demirgüç-Kunt

World Bank - Development Research Group; World Bank

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2008

Abstract

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.

Keywords: Debt Markets, Banks & Banking Reform, Emerging Markets, Access to Finance

Suggested Citation

Caprio, Gerard and Demirgüç-Kunt, Asli and Kane, Edward J., The 2007 Meltdown in Structured Securitization: Searching for Lessons, Not Scapegoats (November 1, 2008). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1293169

Gerard Caprio

Williams College ( email )

Williamstown, MA 01267
United States
413-597-2465 (Phone)
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Asli Demirgüç-Kunt (Contact Author)

World Bank - Development Research Group ( email )

United States
202-473-7479 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/

World Bank ( email )

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Edward J. Kane

Boston College - Department of Finance ( email )

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United States
520-299-5066 (Phone)
617-552-0431 (Fax)

National Bureau of Economic Research (NBER)

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United States

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