This is certainly partially because shadow banking isn’t controlled into the same manner as conventional banks, but for the reason that securitization insulates banks’ lending activity through the funds acquired through the main bank (Gertchev, 2009). Easily put, such banks lending that is less from the capital from main banking institutions or regulatory demands on money and much more regarding the wellfunctioning money areas, including shadow banking, and their interest in securitized assets. Consequently, securitization decouples the website link between monetary base and deposits that are retail the main one hand and credit supply in the other, since credit creation shifts in a means from commercial banks to your market-based finance institutions that buy banks’ loans (Fawley and Wen, 2013).
Sixth, because banks transfer dangers that they originated to many other agents, securitization decreases banking institutions’ incentives to monitor and screen carefully borrowers (because of securitization, banking institutions do not need to hold loans to their stability sheets). The laxer credit requirements and looser testing of borrowers resulted in higher credit development into the 2000s, exacerbating the next economic crisis. Continue reading