So how exactly does this securitization influence the credit expansion and company period?
The very first effectation of securitization is to move the credit risk of the loans through the banking institutions’ balance sheets towards the investors through asset-backed securities (Gertchev, 2009). This ‘regulatory arbitrage’ enables institutions to circumvent book and money adequacy needs and, consequently, to improve their credit expansion. It is because banks need certainly to hold a minimal standard of regulatory money with regards to risk-weighted assets. Whenever banking institutions offer the pool of high-risk loans to an entity that is third they reduce the quantity of dangerous assets and boost their money adequacy ratio. The transfer of loans increases banks’ possible to produce further loans without increasing capital. 11 by doing so
The part of shadow banking in credit expansion might be illustrated because of the undeniable fact that assets into the shadow bank system expanded quickly ahead of the crisis, from $27 trillion in 2002 to $60 trillion in 2007, which coincided with razor- sharp development additionally in bank assets (Financial Stability Board, 2011, p. 8). Securitization creates, therefore, the impression that the actions of this commercial banking institutions are less inflationary than they are really. Continue reading II. The effect of Shadow Banking from the Traditional Banks’ capability to Expand Credit