Securitization as a response to monetary policy

Abstract

This paper studies how monetary easing provides incentives for banks to take risk and issue mortgage‐backed securities (MBS) and, because MBS have the “lemon” property, why MBS buyers are willing to purchase high‐risk securities at high prices. Banks need equity to attract deposits. Monetary easing reduces this need, and banks leverage up and reduce their monitoring efforts. The internal need for liquidity and risk sharing motivates banks to issue MBS. Security buyers understand the moral hazard problem that banks face but are willing to purchase bank securities at high prices because monetary easing would also reduce their cost of funds.

Twenty Years of Mortgage Banking in Slovakia

“…Mortgage banking is highly sensitive to macroeconomic development conditions. Zhang and Xu (2018) suggest that monetary policy supports the securitization of assets, the issuance of MBS (Mortgage Backed Securities), which is driven by the transfer of risks to other entities. They show that "low interest rate not only directly boomed the mortgage lending and softened banks' lending standards but also was an important motive for banks to securitize.…”

The resource reallocation effect of monetary policy

“…For simplicity, we assume that central bank can directly manipulate by, say, changing money supply. Expansionary monetary policy is therefore characterized by an increasing money supply or a lower (see also Zhang & Xu, 2019).…”