The Relevance Of Asset Securitization And Financial Stability

The outbreak of U.S. subprime crisis caused the theoretical concerns about the relationships between asset securitization and financial stability,and some research showed that a view of "both two seldom meet together," which holds that as long as asset securitization has been constantly strengthened on, the financial system will not be stable;and to maintain financial stability, containing the process of securitization should be sure. This dissertation is based on the Marx's Capital theory and mainly interprets asset securitization's dual role on financial stability. In the process of asset securitization, as long as both buyers and sellers of securities keep their promises , have confidence in the future and supply and demand of securities grow balanced, the financial system will maintain a dynamic and stable development; once buyers and sellers of securities speculate excessively, they will be untrustworthy and shake on confidence in the future and the balance of supply and demand in the securities'growth were destroyed, which will cause instability in the whole financial system and ultimately lead to crisis in economic development with the real economy falling into recession then. The financial instability caused by asset securitization objectively requires government intervention force to restore the financial markets credit and economic systems credit through governmental credit, and to create the necessary institutional environment for the financial stability development by the reconstruction of financial regulatory system in order to guide the dynamic growth of economy and finance entering a newly stable phase. From the perspective of China's development of securitization, there is a coordinated interaction between asset securitization and financial stability, and the process of asset securitization should be timely, appropriately and gradually promoted under the objective of maintaining the financial stability development.A rapid development of asset securitization on a global scale has caused significant changes in economic and financial activities, particularly the effects on financial stability of the countries and the world brought by which could not be ignored. It is not only a major achievement of financial innovation, but also a powerful driving force to promote the financial marketization and financial integration. Asset securitization has experienced nearly 40 years of growing up and been accepted and recognized by many of worldly financial market with becoming the most competitively innovative products in financial instruments. Especially in the 21st century, the world's financial liberalization and financial deepening efforts have been strengthened, and asset securitization has also entered a stage of accelerated development, driven the acceleration expansion of economic social credit and in the financial markets been playing an increasingly significant role. However, as asset securitization is used in a widely global scale to improve liquidity, broaden financing channels and improves the degree of risk concentration to play the advantages, it also brings corresponding problems; the U.S. subprime mortgage crisis broken out in 2007 is a good example. During a process of accumulation and outbreak in the sub-prime crisis, even the spread of it, asset securitization becomes a vector of risk accumulation, risk free and risk spread, and the excessive speculation in market caused by which has led to imbalance between supply and demand in securities market and a boom-bust asset price that resulted in serious losses in financial institutions asset and a final collapse of financial system's credit foundation; this round of economic prosperity with the starting point of securities has evolved into the most serious global crisis for the past half century. Just because of this each country's asset securitization business stagnated, as the subprime mortgage crisis has been blamed for the securitization transactions, all countries especially those with undeveloped financial market have slowed the pace of processing securitization arrangements. At this point, the correlation between asset securitization and financial stability is getting a pressing problem faced by theorists, the twoness dispute that asset securitization affects financial stability has been brought to the cusp.In this context, the dissertation chooses a research topic of the relevance of asset securitization and financial stability guided by the classical theory of Marxism and profiles asset securitization's active role in promoting financial stability and negative destructive on the basis of a profound understanding on contents of asset securitization and financial stability; in order to provide valuable reference for fully using asset securitization's positive effect on the economical finance under the premise of maintaining financial stability. This dissertation takes the mechanism of asset securitization on financial stability as a logical main line and the main content is divided into six chapters.The first chapter comes straight to explain asset securitization in real terms on the basis of the classical theory of Marx setting in the development of securitization. As the most important financial innovation tools and methodologies from the age of 1970s, asset securitization shows a developing trend of continuously deepening connotation and expanding extension, but its intrinsic characteristics does not change fundamentally. Basing this paper on the classical economic theory of Marx, the essential economics characters that asset securitization covered by are reinterpreted: As a re-virtualization process of virtual capital, asset securitization takes credit as the running foundation and makes an impact on stable development of economy and finance through its acceleration mechanism of social capital turnover. Furthermore, according to Marx's theory of chrematistics, the dissertation holds that assets securitization is not of economics about monetary as a means of circulation, but problems of chrematistics about how money get value-added by own. With the development of asset securitization, asset has more and more convergently performance to the money that meet people's absolute wealth; and asset-backed securities transactions is not for the purpose to be a means of circulation and purchase, but purely to pursuit of monetary proliferation, therefore, the dissertation clearly defines that the essence of asset securitization is chrematistics, not economics; it is not a means to better life and improve welfare, but a way to achieve monetary proliferation, create interest and profits, it reflects a credit process and is a relationship of supply and demand based on credit in securities market .Regarding financial stability as a research subject, the second chapter investigates the intentional nature of financial stability, the basic theoretical framework and the existing assessment system. The dissertation argues that financial stability is a dynamic equilibrium for supply and demand of trading securities in financial market; as price of securities is in dynamic stability, financial stability can only be a trend in growth of dynamic stability, instead of a static stability; or instability is absolute, constant and stability can only be relative and temporary. The core of financial stability is stability of currency value itself, as long as both borrowers and lenders keep promises in each stage, borrowing and lending will develop stably, finance will develop on stable; as long as there is just only one stage where borrowers are untrustworthy and failure to debt service, borrowing activities are on disruption and finance are turmoil, therefore, the root of financial stability is credit and confidence. It is a long history for academic to research on economic theory of financial stability, economists have used various theories from different point of view to explain robustness of financial markets and financial institutions and root causes of financial instability, in which, the classical Marxist theory gives a systematic and comprehensive explanation of the nature and root of financial instability; additional research is mainly focus on the causes of financial recession from changes of macroeconomic base, and from micro-economic perspective to explain investors'effective information and expectation of financial markets behavior. At last, this chapter takes the IMF financial soundness indicators system as a representation of current evaluation system of financial stability status, combs the basic framework and content for evaluation index system of financial stability, and based on summing up the new developments of currently global finance stability situation assessment, the thinking about perfecting China's financial stability condition assessment system has been advised.The economics essential of asset securitization decides a necessary internal relevance existing between itself and development of financial stability. Finance development is a dynamic recycling process with continuous waving from stabilization to fluctuation, from fluctuation to crisis, and then from crisis restoring to stability; under influence of asset securitization wave a stable development of financial system are not only promoted actively, but also shocked negatively at the same time. The dissertation is set in a long-term development of the U.S. asset securitization market and a financial and economic shock that triggered by sub-prime crisis in recent years, and explores deeply the correlation between asset securitization and financial stability. The third chapter researches the theoretical mechanism about the relevance between asset securitization and financial stability, and through taking asset securitization's positive role in promoting financial stability as the breakthrough point to analyze theoretical basis of the resulting positive effects by following the development context of the U.S. securitization market. Asset securitization promoting financial stability is implemented through its credit expansion mechanism. Credit expansion is good to the stable development of economy and finance, and asset securitization's chrematistics nature decides its'trend of continuous expansion for pursuit of currency proliferation in economic and financial activities, and thus become the most important form of credit expansion in a modern economy. During the market supply and demand of asset securitization grow balanced, on one hand, it achieved volume expansion; on the other hand, there may be to maintain price stability in asset-backed securities in order to achieve firmness of economic and financial credit-based to achieve financial stability.The fourth chapter further discussed that excessive speculation is triggered by credit expansion of asset securitization and thus poses a threat to financial stability. Asset securitization under a growing market supply and demand once forms excessive speculation in the financial system with breaking supply and demand equilibrium of the stock market; it will undermine the economic basis between economic men and inevitably lead to prices spike in asset-backed securities market. The developments of asset securitization probably increase inherent vulnerability of financial institutions; volatilities in financial asset prices produce an external shock to the financial system, which initiate a liquidity crisis in financial institutions represented by a liquid crisis in financial institution and a credit crisis in financial system, and then spread further to the real economy, ultimately economic development process breaks the crisis out and goes into recession. When market supply and demand imbalanced and credit base of economic and financial operations were breakdown and market mechanism failures, an objectively financial instability situation calls for the government intervention in order to restore credit of financial market and economic structure through government credit, to create necessary institutional environment for stable development of finance through reconstruction of financial regulatory system, and to lead economic and financial development to a new stabilization stage.An empirical research method is used in the fifth chapter to test the effect of asset securitization on financial stability, by selecting three main indicators of the financial stability assessment system in second chapter including business banking indicators on behalf of core category, real estate prices indicators on behalf of encouraged category and money supply indicators on behalf of macro-prudential category. The conclude is that there is cointegration relationships among assets securitization and each financial stability evaluation indicators, thus provides a degree experience of support to the preceding theory analysis.The last part of the dissertation shifts the perspective to China's asset securitization market, from the angle of an interaction between the development of asset securitization and financial stability in China. With the current development trend of global asset securitization market, on one hand, China's pilot of credit asset securitization market has had the appropriate market basis, legal regulation and supervision system and are able to benign a growth stage under a smoothly running financial environment, and sub-prime crisis is not enough to make us give up or stagnation the development of securitization ; on the other hand, it is proposed that under the premise of ensuring a sound operation of the financial system, the process of asset securitization should be pushed on so that it could play an active role on financial stability, which issues must be addressed for the current development of asset securitization in China. To promote the steady development of asset securitization in China, appropriate principles should be followed; timely, appropriate and progressive advance of the strategy should be taken; balance of virtual economy and real economy should be met; principles of encouraging securitization innovation and emphasizing on strengthening financial supervision should be equally insisted on. The changes from government-led to the marketization for securities development should be seek and use of securitization vehicles and monetary policy coordination should be strengthened; thereby, while rational using securitization vehicles to improve stability of financial system, effective measures to prevent the risk of asset securitization are taken.