Introduction on What Role Did Securitization Play in the 2008 Financial Crisis?

        The Securitization said to be an innovation made to improve the financial system stability and resilience by reorganizing all of the financial risk proficiently. Up till now the housing bubble that triggered and explodes the 2008 worldwide financial crises was increase by this financial method. It permits all of the banks to sell and repackage terrible debt, as well as mortgages and loans, to third party shareholder as a security. The banks also compensated some of the credit rating agencies to offer the credit for tranches. This was also said to be the conflict of interest. Not all of the credit rating agencies were independent in tranches evaluation; therefore their clients were the banks. At smaller-level, it promotes the banks opportunistic behavior that created opaque, lower quality and complex economic assets. 10 years afterward and return of this hazardous business can now be seen (Deku 2018).

        The 2008 financial crisis also put light one the securitization dark side. At time when the housing bubble burst, shareholder undergone from major losses and also lost their interest and confidence in securitization (GALLANT 2018). Furthermore severe dictatorial responses to deal with the deficiencies of securitization markets have render these dealings expensive for the banks to engineer. The investor Minimal interest attached with requirements of the tougher authoritarian has had a damaging impact on the securitization (Gerard Caprio, Demirgüç-Kunt and Kane 2009). The securities volume that was issue shrank considerably in the period of post-crisis, particularly in the Europe. Today, ten years subsequent to crisis, policymakers of the economy are enthusiastic to renew it. They articulate that a securitization market that is well-functioning will offer important payback to the growth of the economy of the European countries. On the other hand, there is little experiential evidence supporting this declaration. In this report the role of Securitization in the financial crises of 2018 are discussed by analyzing the CDO, role credit rating agencies and higher demand of CDO in investors (Deku 2018).

References of What Role Did Securitization Play in the 2008 Financial Crisis?