1 Asset Securitization. 2 Mortgage borrowers BankInvestors No securitization.
Importance of Securitization
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Transcript of Importance of Securitization
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Importance of Securitization
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The Financial Crisis
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Run on the Repos
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The Financial Crisis
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Regression Results
• Roughly same results for repo spreads. – Rise in LIB-OIS (proxy for counterparty credit risk
in banking system) leads to increase in spreads.• Repo haircuts depend on expected volatility in
underlying collateral– More expected volatility implies larger haircuts.
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Implications
• Problems in sub-prime market led to higher LIB-OIS.• Higher LIB-OIS lead to larger credit spreads on
securitized bonds and repos. • Higher credit spreads led to more uncertainty about
bank solvency and lower values for repo collateral. • Concerns about liquidity of bonds used for repo
collateral led to rising repo haircuts (equivalent to a bank run).