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

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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…show more content…
Banks however, are required to report a part of the ABS as liabilities that they guarantee through credit enhancement provisions (Wolfe, 2000). By securitising assets and removing them from their balance sheet, banks can use the cash proceeds for a number of reasons such as to reduce deposit levels, retire a debt, and buy back share capital (Wolfe, 2000). Twinn (1994 in Wolfe, 2000) shows that as capital requirements of bank increases, so does the absolute quantity of assets securitized. Banks willing to expand their loan provision business without increasing their capital or liabilities resort to securitization. Corporate issuers securitize to efficiently access capital markets in lieu of intermediated debt finance at a cost of capital, which would not be possible on issuer’s own credit rating more efficiently (Jobst, 2006). The securitized lending function has three steps: originate, sell, and service. When servicing rights are sold, securitized lending can be reduced to a two-step process; originate and sell (Sinkey, 2001). By contrast the traditional approach of bank lending is balance-sheet lending, which has four functions: originating, funding, servicing, and monitoring. Originating refers to making the loan, funding implies that the loan is held on the balance sheet, servicing means collecting the payments of interest and principal, and monitoring means to

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