tippet, the size of the fractional reserve requirement really has nothing to do with this. While loans are on a bank's books, they count towards both requirements, the Fed's reserve requirement (which is really more a function of the deposit base) and the capital requirement. When the loans are sold, they go off of the books. Now presumably, the banks could take the proceeds of the loan sale and make new loans, bundle them up and sell them, etc. Note here that the total amount of debt would be increasing, but not the total amount of bank debt, which actually remains relatively constant throughout the process. Banks in this case are simply serving as loan originators, but the actual and ultimate suppliers of funds are the capital market investors who buy the securities whose payments come from the mortgage pools. Notice, then that in the process, each dollar of debt claims (say from the original mortgage pool) supplies the cash flows for the next dollar of debt claims (the securities - usually bonds) in a tight one-to-one correspondence. Thus, you do not have the pernicious use of leverage whereby each $1 of original securities forms the cornerstone for $5 or $10 worth of downstream securities. Asset-backed securities, at least with respect to guaranteed home mortgages represent no threat of any kind, and are a great boon to banks (with respect to generating fee income and allowing them to get long-term, fixed rate mortgages and the interest rate risk they represent out of their portfolios) and capital market investors alike. Problems have arisen in the past, however, when securities like bonds have been written on pools of underlying assets that do represent substantially more risk, like CARDS, which are securities written on pools of credit card debt. It is still a caveat-emptor market in that it behooves the investor to know the risk characteristics of the underlying asset pool, and whether said cash flows are truly guaranteed or not. I hope this helps.
jess. |
