Financial Institutions and Markets
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World economy is strongly influenced by financial sphere. The performance of national financial markets determines stability and success of every country’s economy. The existence of international financial institutions and markets is one of the strongest consequences of globalization; they form an international financial system that rules other economic sectors. Thus, the main aim of this paper is to analyze an individually chosen article about financial institutions and markets in order to explain its relevancy to material covered in class.
“IMF Defends Securitization Markets”
This article from Financial Times focuses on analyzing the current state of the securitization markets; moreover, it studies the proposals to reform the market.
The information illustrated in the article is relevant to the material covered in class since it supports the statement about the need of the model for the securitization market. Furthermore, the author explains the reasons to the crisis in the banking industry.
Recent unstable situation of the securitization markets has been partially caused by increased money flows to households with low chances of paying it off. However, the main reason for difficulties in the secor is the financial crisis that started in 2007. Since then, the market activity was aimed at selling individual customers loans to insurance companies, pension funds, and other investors from non-banking spheres that are able to manage the risks. The concept of decreasing risks with the help of traditional depository institutions was also covered in the class. Furthermore, the article provides invaluable explanation of the securitization process and the reasons to securitize that was studied in the class.
Another reason for the securitization market crisis is connected to the incompatible incentives given to the market affiliates that made banks accumulate money not from the loans performance, but from the paid fees. The product risks were underestimated, and the process was not well planned since all operations were speed up in order to generate more profits.
The author enlightens that the asset-backed securities and covered bonds formed the majority of the new residential mortgage loans funding in most highly developed countries before the crisis. This information was also presented in the class showing that the non-standard loans implied higher risks. Thus, as the result of analyzing the article and information from the class, it can be concluded that the rise of the risks was one of the reasons of the poor performance of the securitization market dduring last few years.
The market needed to be restructured in order to increase its efficiency after the collapse in 2007. Different reforms were suggested, although The International Monetary Fund (IMF) argues that some proposals for the reforms would provide ineffective incentives or slow down the recovery of the market even more.
The International Monetary Fund states that the securitization market has to be restructured in the way that would provide a sustainable footing for it. The new reform would have to depend on the underlying loans quality. The idea about holding on to the first five percent of losses from every securitization was criticized by IMF since it is not flexible enough. Moreover, IMF suggests not starting the emergency interventions until the situation in the market is definitely healthy.
Thus, the article, which was used for the research, supports multiple statements studied in the class material. It provides detailed explanations for the reasons which caused the current state of the securitization market. Moreover, studying the article and material from the class helps to get an understanding of how the securitization mechanism works and what reforms have to be taken in order to improve the situation of the securitization market.