Media Briefings


  • Published Date: March 2009

The credit crunch had its roots in ‘securitisation’ – the parcelling and selling on of risks by banks to other investors. That is the finding of research by Professor Hyun Song Shin, published in the March 2009 issue of the Economic Journal and summarised in a column on Vox:

Securitisation was meant to disperse risks so that deep-pocketed investors who were better able to absorb losses would share in the risks associated with bank lending. But in reality, securitisation worked to concentrate risks in the banking sector.

There was a simple reason for this. Banks wanted to increase their ‘leverage’ – to become more indebted – so as to spice up their short-term profit. So, rather than dispersing risks evenly throughout the economy, banks bought each other’s securities with borrowed money. As a result, far from dispersing risks, securitisation had the perverse effect of concentrating all the risks in the banking system itself.

For this reason, Professor Shin argues that securitisation has amplified the financial cycle. Accounting rules had a role in the amplification. Banks now have to update the value of their assets based on the current market price: a practice known as ‘marking to market’.

But as banks determine how much they borrow (their leverage) based on their assets, this means that they increase their borrowing in a boom as asset values increase. This causes the boom to go on for longer than it otherwise would.

But in a downturn, banks’ assets fall in value. This causes them to reduce their borrowing, which in turn causes asset prices to fall further. This causes busts to be sharper and deeper than they would otherwise be – and this is what we have been seeing in recent months.

Financial contagion is often viewed through the lens of cascading defaults, where if A has borrowed from B and B has borrowed from C, then the default of A affects B, which then affects C, and so on.

But in a modern market-based financial system where assets have been securitised and traded in the financial system, the main channel of contagion is through the fluctuations of balance sheets that arise from changes in the measured risks of leveraged financial intermediaries.


Notes for editors: ‘Securitisation and Financial Stability’ by Hyun Song Shin is
published in the March 2009 issue of the Economic Journal.

A summary is published on Vox:

Hyun Song Shin is at Princeton University.

For further information: contact Hyun Song Shin on +1 609 258 4467 (email:; or Romesh Vaitilingam on 07768 661095 (email: