Chapter 8: Securitization and Shadow Banking Flashcards
(4 cards)
What are the basic steps of securitization?
A bank pools similar loans, sells them to a special-purpose vehicle (SPV), and the SPV issues tranches of securities backed by those loans—letting banks remove assets from their balance sheet and tailor risk to investors.
How can securitization create fire-sale dynamics?
If asset prices fall, banks’ capital ratios drop, forcing them to sell securitized assets into a falling market, which further depresses prices and can spiral into broader market stress.
Why does shadow banking emerge under capital regulation?
Facing limits on equity relative to assets, banks shift risky exposures into trust funds (shadow intermediaries) that accept deposits but can’t invest themselves—creating off-balance-sheet funding channels.
What mechanism in the Kiyotaki–Moore model produces asset-price cycles?
Land pledged as collateral links borrowing capacity to expected land prices, so rising prices loosen borrowing (fueling booms) and falling prices tighten it (triggering busts), generating self-reinforcing cycles.
