So how exactly does this securitization impact the credit business and expansion cycle?
The very first effectation of securitization is always to transfer the credit threat of the loans through the banking institutions’ balance sheets into the investors through asset-backed securities (Gertchev, 2009). This ‘regulatory arbitrage enables that are to circumvent reserve and money adequacy needs and, consequently, to boost their credit expansion. The reason being banking institutions have to hold a minimal amount of regulatory capital in terms of risk-weighted assets. Whenever banking institutions sell the pool of dangerous loans up to an entity that is third they reduce steadily the number of dangerous assets and boost their capital adequacy ratio. By doing so, the transfer of loans increases banks’ possible to create further loans without increasing money. 11
The part of shadow banking in credit expansion could be illustrated by the known proven fact that assets into the shadow bank system expanded quickly prior to the crisis, from $27 trillion in 2002 to $60 trillion in 2007, which coincided with sharp development additionally in bank assets (Financial Stability Board, 2011, p. 8). Continuar lendo II. The effect of Shadow Banking in the Traditional Banks’ capacity to Expand Credit