Introduction to Securitization

REDUCES THE EFFECTIVES OF MONETARY POLICY

In 1992, the Bank for International Settlements (1992) while recognizing the potential advantages of securitization also expressed concerns that could potentially offset those benefits. These concerns are beyond those the Bank for International Settlements identified as regulatory concerns. A major concern was that making credit available by allowing borrowers direct access to end lenders of funds could lead to the reduced role of banks in the financial intermediation process and less financial assets and liabilities held at banks. This could make it more difficult for monetary authorities to implement monetary policy. Thus, during periods of tight monetary policy, for example, banks can originate loans and then securitize the loans rather than holding them in their portfolio. This avoids the need for banks to fund the loans originated.

At a theoretical level, there are various theories that economists have proffered to explain securitization’s influence on monetary policy. Bernanke and Gertler (1995) identify two channels through which securitization can influence monetary policy: the bank lending channel and the balance sheet channel. Both theories are based on the effect of cyclical changes on the suppliers and demanders of credit. The bank lending channel theory is based on cyclical changes in the ability of banks to intermediate credit while the balance sheet channel theory is based on cyclical changes in the financial condition ...