Abstract and Keywords
This article describes the rise and fall of the parallel banking system based on securitisation. In essence, the parallel banking system emerged as a result of de-regulation and disintermediation, and led to a period of very high and, in retrospect, unsustainable, leverage. Its development was facilitated by the creation of new financial instruments (notably credit default swaps and collateralised debt obligations). Instead of keeping loans on their books, banks and other financial players were originating them, bundling them together, slicing into tranches, and selling these tranches to other investors, such as pension funds, insurers, etc., with different and complementary risk appetites. While this system supported the real economy for a long time – especially consumer, real estate, and leveraged finance – it contributed to the build-up of leverage in the global capital markets and subsequent worldwide crisis.
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