Securitization and Subprime Crisis: a Critical Analysis of the Role Credit Rating Agencies

7542 Words May 26th, 2013 31 Pages
Title: SECURITIZATION AND SUBPRIME CRISIS: A CRITICAL ANALYSIS OF THE
ROLE OF CREDIT RATING AGENCIES

Dr. Quamrul Alam
Department of Management
Monash University
Email: quamrul.alam@buseco.monash.edu.au
Phone: +613 99031030

ATM Tariquzzaman
Postgraduate student
Faculty of Business & Law
Deakin University
Melbourne, Australia
Email: atm_zaman@hotmail.com; tuz@deakin.edu.au

Mohammad Abu Yusuf
Department of Management
Monash University
Mohammad.yusuf@buseco.monash.edu.au
Phone: +613 99034662

SECURITIZATION AND SUBPRIME CRISIS: A CRITICAL ANALYSIS OF THE ROLE OF CREDIT RATING AGENCIES

ABSTRACT
Rating agencies play a vital role in converting illiquid assets in to marketable securities. This paper
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Section four makes a brief review of CRA regulations and recently undertaken regulatory measures. Section five comprises a brief discussion on the role of different actors in contributing to subprime crisis. Section six is a conclusion.

2. ASSET SECURITIZATION -CONCEPTUAL ISSUES

Securitization became an important instrument in the US financial system in the 1970s. At that time, the Government National Mortgage Association issued securities backed by a pool of residential mortgage loans. Starting in the 1980s, other income-producing assets began to be securitized (Jobst, 2008). During the last decade or so, it has rapidly developed in Europe especially in the UK, Italy, Germany, Australia and French.
Although securitization could be both ‘on balance sheet’ and ‘off-balance sheet’, the term has been used more recently to refer to the ‘off-balance sheet’ securitisation. While banks and other financial institutions view securitization as an expedient means to escape inconsistent regulatory capital charges for credit exposures (i.e. For “optimisation of regulatory capital”), non-financial entities employ securitization primarily for the liquidity management of existing receivables (Jobst, 2006: 735-36).

Easing regulatory capital requirements in order to manage risk, reduce the size of the bank but at the same time increasing their return on capital through repeated securitization are the main

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