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The 2007 meltdown in structured securitization : searching for lessons, not scapegoats
 
Author:Caprio, Gerard, Jr.; Demirguc-Kunt, Asli; Kane, Edward J.; Collection Title:Policy Research working paper ; no. WPS 4756
Country:World; Date Stored:2008/11/25
Document Date:2008/11/01Document Type:Policy Research Working Paper
Language:EnglishRegion:The World Region
Report Number:WPS4756SubTopics:Access to Finance; Emerging Markets; Debt Markets; Banks & Banking Reform;
Volume No:1 of 1  

Summary: The intensity of recent turbulence in financial markets has surprised nearly everyone. This paper searches out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to divert attention from the underlying breakdown of incentives. Incentive conflicts explain how securitization went wrong, why credit ratings proved so inaccurate, and why it is superficial to blame the crisis on mark-to-market accounting, an unexpected loss of liquidity, or trends in globalization and deregulation in financial markets. The analysis finds disturbing implications of the crisis for Basel II and its implementation. The paper argues that the principal source of financial instability lies in contradictory political and bureaucratic incentives that undermine the effectiveness of financial regulation and supervision in every country in the world. The paper concludes by identifying reforms that would improve incentives by increasing transparency and accountability in government and industry alike.

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