TY - JOUR
T1 - Securitisation, Ring-Fencing and Real Estate Bubbles: Financial Stability Implications of UK EU Bank Reforms
AU - Cullen, J.
N1 - copyright The Author(s) 2018. Published by Oxford University Press. This is an author produced version of a paper subsequently published in Journal of Financial Regulation. Uploaded in accordance with the publisher's self-archiving policy.
PY - 2018/3/1
Y1 - 2018/3/1
N2 - Declines in property markets played a central role in the Great Financial Crisis. Off-balance sheet financing activities, particularly securitisations, were used to fund higher volumes of bank lending, concentrated in real estate. In response to the current low appetite for securitisations, the European Union has proposed a new Securitisation Regulation, with the aim of restarting EU securitisation markets. This article explores the possible legal and economic significance of this Regulation and argues that the proposed approach to regulating securitisation is likely to be deficient. Instead of addressing flaws in the securitisation process through improved incentives ? which I term ?process-focused? regulation ? regulation ought to concentrate on the excessive credit-origination which securitisation may facilitate. This is particularly relevant to housing bubbles, which in general are driven by over-optimistic expectations about future house prices, shared amongst lenders, borrowers and investors. Improving incentives in credit-channel widening structured finance when all parties are over-optimistic is unlikely to guard against future bubble formation. This is particularly relevant to the UK market in light of structural reforms to the UK banking sector (so-called ?ring-fencing?), which is likely to result in today?s large universal banks being converted into monoline mortgage lenders.
AB - Declines in property markets played a central role in the Great Financial Crisis. Off-balance sheet financing activities, particularly securitisations, were used to fund higher volumes of bank lending, concentrated in real estate. In response to the current low appetite for securitisations, the European Union has proposed a new Securitisation Regulation, with the aim of restarting EU securitisation markets. This article explores the possible legal and economic significance of this Regulation and argues that the proposed approach to regulating securitisation is likely to be deficient. Instead of addressing flaws in the securitisation process through improved incentives ? which I term ?process-focused? regulation ? regulation ought to concentrate on the excessive credit-origination which securitisation may facilitate. This is particularly relevant to housing bubbles, which in general are driven by over-optimistic expectations about future house prices, shared amongst lenders, borrowers and investors. Improving incentives in credit-channel widening structured finance when all parties are over-optimistic is unlikely to guard against future bubble formation. This is particularly relevant to the UK market in light of structural reforms to the UK banking sector (so-called ?ring-fencing?), which is likely to result in today?s large universal banks being converted into monoline mortgage lenders.
U2 - 10.1093/jfr/fjx010
DO - 10.1093/jfr/fjx010
M3 - Article
SN - 2053-4841
VL - 4
SP - 73
EP - 118
JO - Journal of Financial Regulation
JF - Journal of Financial Regulation
IS - 1
ER -
