Securitization is a procedure whereby a financial institution creates a package of different assets, such as loans and credits, and then sells it. Thanks to this operation the issuer receives immediate cash and reduces the risk of its business by transmitting part of it to the investor. The buyer receives a profit in form of regular payments throughout the life of the instrument and also the amount lent at the end.
Securitization instruments played a vital role as one of the triggers of the 2008 financial crisis due to its importance in the credit crisis that affected the United States financial system. During the early 2000s, investment banks increased the commercialization of securitization titles backed with mortgage loans such as MBSs and CDOs. There was a huge demand boosted by low-interest rate conditions and the illusion that the real estate market was solid rock. Then banks started to bundle high-risk mortgages, also known as subprime, into those assets. As debtors began to fail their payments after the real estate bubble burst, and investors realized that the titles were full of toxic mortgages, the market for those products deteriorated and some specialized institutions went bankrupt. The bottom line was the loss of trust among market’s agents and the subsequent credit crisis that later passed on to other economies and ended up, after several mutations, being a central cause of the 2008 financial crisis.
After pumping cash into the markets for over than a decade, the European Central Bank (ECB) is considering the way it controls interest rates and transmits monetary policy. The ECB will have to determine its monetary policy framework to adapt it to a new era characterized by the contraction of the stimulus measures and the reduction of its balance sheet and excessive liquidity.
Whom and where it affects?
It mainly affects the ECB and the national central banks of all countries that have adopted the euro.
What sort of public or private institutions are involved?
Among public institutions involved, we can find the European Central Bank (ECB), the Federal Reserve (FED) and the Bank of England (BOE).
Why is it important for Banking and Finance?
Changing the monetary policy framework of the Eurosystem could affect the entire banking and financial system. The main objective of the ECB is to maintain price stability in the euro zone; through interest rates, it can influence economic activity, alining it with inflation objectives.
Focusing on the banking sector and taking into account that one of its main functions is to transmit monetary policy, a change in its framework would mean a turn on its business strategies.
What do you think will be the consequences in the foreseeable future?
Since the main objective of the Eurosystem is to ensure price stability and taking into account that the HCIP (Harmonised Index of Consumer Prices) is around 2.1% for the euro area, what we can expect is the implementation of monetary policies that prevent higher inflation. This will inevitably lead to the reduction of the quantitative easing programmesand the rise of interest rates on Main Refinancing Operations (MRO), Deposit facility, and Marginal Lending Facility.
The increase in interest rates will make borrowing more expensive and saving more attractive. This will have important effects throughout the entire financial system and affect growth development. Some of the plausible consequences of this decision could be: the increase of interbank lending rates (Eonia and Euribor) and the subsequent effect on assets that depend on these indexes; more expensive bank loans and credits and more attractive deposits, a situation that might improve banks’ income statements; increasing yield expectations over bonds, rising financing costs both for governments and corporations, and putting pressure on stock markets, demanding higher returns.
Summing up, a change in the monetary policy framework would inevitably lead to a scenario of costly financing, investment decline and more savings that would cause a deceleration of economic growth. Nevertheless, it is important to emphasize the complexity of this decision, that would be made after careful deliberations and in the right time.
Key words:
Monetary Policy, ECB, Deposit Facility, Eonia and Euribor.
It is model or a way of banking that embraces environmentally and socially conscious practices. While “traditional” banks try to earn profits, the ethical banks try to do it in a way consistent with their principles and values, such as participation, transparency, coherence, implication…
An ethical bank invests in projects that aim to earn a healthy profit and to make a positive difference in society. It finances those businesses with their depositors and investors’ money. So, the money that those people save is invested back into the society they are living in.At any time, customers know what the bank does with their money (transparency). The supported projects of each organization to whom they lend money for, are published in the bank website. By lending exclusively to those organizations that put people and planet before profits, the savers’ money contributes to create a positive impact and real returns (real economy).This type of banking makes the difference because it only invests in things which are good for both people and the planet. Things like renewable energy, organic farming and ecological development. In addition, it offers the possibility of being able to share part of the interests generated with different social, cultural and environmental organizations. On the other hand, they do not offer services that include alcohol, gambling products, pornography, tobacco and weapons.
Example: “For self-employed copywriter Kate Duggan and her partner Rick, ethical banking was a natural consideration when deciding where to save their money.
Having once worked at an ethical bank herself, Duggan was well aware of the growing awareness of responsible investing. This is when savers put money in funds or accounts that support social and environmental programs that aim to bring about a positive change.”
«Bank Panic» happens when many clients withdraw their money from banks because of a lack of trust and fear that they will not return the cash. This massive withdrawal of deposits can happen in contexts of financial crisis or changes in the economic policy of a country.
This panic can destabilize a bank to the point that its system collapses due to a lack of liquidity and it has to face bankruptcy.
The bankruptcy of an important financial institution, can produce a contagion effect to other big institutions, affecting the stability of the global international financial system, which is known as systemic risk.
Example:
“Thousands of depositors, panicked by rumors, lined up today in the steamy August heat to withdraw their money from the venerable Standard Chartered Bank, one of two banks that issue Hong Kong currency.”
