The Impact of Capital Regulation on Bank Involvement in Securitized Banking

Abstract

In the aftermath of the global financial crisis of 2007-09, bank involvement in securitized banking gained considerable attention and is claimed to be one of the main sources of the crisis. Securitized banking is the use of securitized instruments as collateral in repurchase agreements (repo), which allowed financial institutions to borrow money from each other for very short periods of time. The crisis highlighted the shortcomings of global financial regulation and the failure of banks and regulators to incorporate the risks from securitized banking in capital regulation. The dissertation assesses the role of international capital regulation – the Basel Accords, in encouraging bank involvement in securitized banking. Emphasis is on the presence of regulatory capital arbitrage, which refers to strategies by which regulated financial institutions evade capital requirements. The dissertation conducts a legal analysis of the Basel Accords to evaluate the underlying incentives and their impact on bank involvement in securitized banking.