Factors generating and transmitting the financial crisis: The role of incentives: securitization and contagion

This contribution attempts to explain the recent financial crisis and the subsequent Great Recession from the point of view of incentives that change as a consequence of securitization and contagion processes. It provides a critical analysis of the basic principles of the Asymmetric Information Approach and its two branches that view differently the evolution of banking and the role of securitization in it. The former focuses on its impact on the traditional model of commercial banking, whereas the latter sees the role of securitization in the emergence of a parallel banking system (shadow banking). This divergence between the two approaches leads to different policy implications that can be drawn from the analysis of the crisis, advocating respectively the elimination (or heavy mitigation) of securitization and shadow banking, and the strict regulation of shadow banking and all the credit transfer processes. The paper is organized in three parts: the first finds out the crisis and the contagion within the financial system; the second is focused on the securitization process, describing the agents involved and the associated risks; finally, the third part is devoted to the theoretical analysis, particularly within the asymmetric information framework.