Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 317: Subprime Borrowers, Securitization and the Transmission of Business Cycles

Anna Grodecka ()
Additional contact information
Anna Grodecka: Financial Stability Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: A growing literature (i.e. Jaffee, Lynch, Richardson, and Van Nieuwerburgh, 2009, Acharya and Schnabl, 2009) argues that securitization improves financial stability if the securitized assets are held by capital market participants, rather than financial intermediaries. I construct a quantitative macroeconomic model with a novel specification for mortgage-backed securities (MBS) to evaluate this claim for subprime securitization during the Great Recession. I find that output in the U.S. would have dropped by only about a third and house prices by only a half of what we actually observed, if subprime MBS had been purchased by non-financial agents, rather than held by banks. This is because banks are subject to capital requirements and if MBS remain within the banking system, the fall in their value puts a strain on banks’ balance sheets. The subsequent deleveraging amplifies business cycles. My findings suggest that the existence of the securitization market stabilizes the economy under the condition that financial intermediaries do not engage in the acquisition of securitized assets.

Keywords: Subprime Borrowers; Securitization; Financial Intermediation; Great Recession

JEL-codes: E32; E44; G01; G13; G21; R21

58 pages, March 1, 2016

Full text files

rap_wp317_160303.pdf PDF-file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Lena Löfgren ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-02-05 17:13:28.