Streamline Training & Documentation: Hyun Shin on Securitization and Systemic Risk

Thursday, October 01, 2009

Hyun Shin on Securitization and Systemic Risk

Among those weighing in on the root causes of the current global financial crisis is Hyun Song Shin, an economics professor at Princeton. He has written a number of academic papers on the subject, but you can also find a quite accessible version of his analysis, "Securitisation and Financial Stability," at www.VoxEU.org.¹

Shin's column is only about four pages, so easy to read in its entirety. In sum, Shin's argument is that

... [securitisation] undermined financial stability by concentrating risk. Securitisation allowed banks to leverage up in tranquil times while concentrating risk in the banking system by inducing banks and other financial intermediaries to buy each other's securities with borrowed money.

Shin rejects the idea that the basic problem was banks issuing risky loans, which they then passed off like "hot potatoes" to investors who, in come cases, weren't fully aware of the risk they were assuming.

In Shin's view, of much more significance was the fact that banks bought each other's subprime mortgage-backed securities. The banks then used those assets to back their own subprime lending. What resulted was an interlocking of bank balance sheets (including balance sheets of related special purpose entities), pockmarked with risky assets, that produced dangerously elevated systemic risk.

__________
¹ VoxEU.org is a portal set up by the Centre for Economic Policy Research. Professional economists are encouraged to submit columns that are policy-related, research-based, and written at a level accessible to VoxEU's intended audience, namely, "economists in governments, international organisations, academia and the private sector as well as journalists specializing in economics, finance and business."

###

Labels: Business acumen, Systems thinking

<< Home