Regulating Securitisation: The Housing Price Bubble, Financial Stability, and Basel III

Abstract

The severity of the consequences of financial instability calls for studies of financial markets from many different angles to develop a comprehensive picture of possible causes. These causes were, as will be argued in this thesis, of little concern to pre-crisis financial regulation. Instead, regulation focussed on the market process as a regulatory mechanism, a stance commonly adopted under the ideology of neoliberalism that permeated political discourse from the late 1970s. Neoliberalism derived its faith in the market process from the neoclassical conception of the market. Neoclassicists believed that the market did not need a regulatory framework to efficiently allocate resources to the benefit of society. Their belief was so strong that they ignored concerns over financial instability with dire consequences that materialised during the global financial crisis. This thesis will employ the Financial Instability Hypothesis (FIH) to discuss the inherent instabilities of financial systems that are in large part attributable to financial innovation. Policymakers used financial innovation and, particularly, securitisation in the Basel Accords on capital requirements to give capital markets the power to allocate capital to the benefit of society. The FIH will reveal that securitisation contributed to driving increases in leverage and housing prices in pre-crisis years to a point where the financial system collapsed. The issues to be discussed should feature in post-crisis regulatory developments. To determine the extent to which this is the case, this thesis will discuss Basel III in light of the discussion of the FIH and securitisation. It will become apparent that Basel III introduces many important reforms, especially in the context of liquidity and leverage requirements. Since the Basel Accords used securitisation as a tool in pre-crisis years, this thesis will discuss whether Basel III continues to be informed by the neoclassical conception of the market in its market discipline mechanism. It will ultimately conclude that Basel III does not address the regulatory failures that allowed securitisation to drive the housing price bubble. It continues to believe in the efficiency of the market process.

Date of Award	1 Aug 2019
Original language	English
Awarding Institution	The University of Manchester
Supervisor	Vincenzo Bavoso (Supervisor) & Michael Galanis (Supervisor)