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To: DuckTapeSunroof who wrote (39720)	12/17/2009 5:15:14 PM
From: TimF	Read Replies (1) \| Respond to of 71588

Can you give an EXAMPLE of "how reserve requirements were modified to benefit securitization over 'hold your on' loans"? 1. An FDIC document on the risk weights of different bank assets. The higher the weight, the more capital the bank has to hold against that asset. As I read table 1 and table 3, if you originate a loan with a down payment of 20 to 40 percent, the risk weight is 35. But if you buy a AA-rated security, the risk weight is only 20. So if a junk mortgage originator can pool loans with down payments of less than 5 percent, carve them into tranches, and get a rating agency to rate some of the tranches as AA or higher, it can make those more attractive to a bank than originating a relatively safe loan. If you want to know why securitization dominated the mortgage market, this explains it. Regulatory arbitrage, pure and simple. econlog.econlib.org The document mentioned is linked to in the blog post, or you can go to it directly, here fdic.gov Also see econlog.econlib.org