Call for PapersThe 2008 UniCredit Conference on Banking and Finance: Beyond the Illusion of Risk Diffusion

Abstract

The current turmoil in the credit and securities market has exposed the limitations of current risk-based measures of bank capital, the potential dangers from loan securitization and the difficulties of locating and evaluating risk in opaque markets. These events raise important issues for regulation: should bank capital ratios be based on marked-to-market measures of bank assets? What are appropriate accounting rules for SIVs/Conduits, and should prudential rules restrict the maturity mismatches that SIVs/Conduits can generate? Is regulation needed to raise the level of transparency in securitization and/or set standards for credit rating agencies? Are there risks of an excessive regulatory response to the crisis? The crisis also raises thorny questions regarding the future viability of the banking business model known as “originate-to-distribute”: is this system truly capable of distributing credit risks beyond the boundaries of the banking system? Can it be made to work in a situation of low market liquidity when marking to market is required? Can the model be modified so as not to lead to mispricing of risk? If, instead, this banking business model cannot be saved, should we expect a permanently lower supply of credit, or anyway a structural change in bank-firms interactions? And how will this change the impact of monetary policy on bank behavior?