Securitization and business cycle: an agent-based perspective

Abstract

We study the effects of loans and mortgages securitisation on business cycles by using a large-scale agent-based stock-flow consistent macroeconomic model and simulator, that we enriched by including a financial vehicle corporation (FVC), that buys loans and mortgages from banks and issues ABSs and MBSs, and a mutual fund, that invests both in ABSs and MBSs. Households own the equity of the mutual fund in the form of equity shares. By means of securitisation, banks conduct regulatory capital arbitrage and reduce risk weighted assets in their balance sheet, in order to lend more loans and mortgages. Results show that different levels of securitisation propensity are able to affect credit and business cycles in different manners. On one side, securitisation increases banks lending activity, influencing positively investment and consumption. On the onther side, the increased amount of credit amplifies the negative shocks, due to higher loans write-offs probability, triggered by the boosted leding activity. Firms' bankruptcies impact the equity of banks, affecting their ability to grant new loans to consumption goods producers (CGPs), which need credit for their production activity, and mortgages to households, which are not able to purchase housing units. CGPs soon go bankrupt and households see their capital income reduced. The predominance of one effect on the other depends on the level of securitisation propensity and the time span considered.

Inequality and finance in a rent economy

“…At the best of our knowledge, only a restricted bunch of papers describe the impact of securitization on the behaviour of the financial system as a whole, none of them connecting the development of the securitizing system to rising inequality. Mazzocchetti et al (2017) and Lauretta (2018) propose two agent-based models, in which the authors try to describe the effects of securitization and the ensuing expansion in the provision of loans to the economy on growth and the business cycle. In their model, however, securitization is a supply-driven phenomenon (Mazzocchetti et al, 2017), 6 or it amounts to a pure parametrical exercise (Lauretta, 2018), which does not show any form of endogeneity and coevolution with the distribution of income and wealth.…”

“…Mazzocchetti et al (2017) and Lauretta (2018) propose two agent-based models, in which the authors try to describe the effects of securitization and the ensuing expansion in the provision of loans to the economy on growth and the business cycle. In their model, however, securitization is a supply-driven phenomenon (Mazzocchetti et al, 2017), 6 or it amounts to a pure parametrical exercise (Lauretta, 2018), which does not show any form of endogeneity and coevolution with the distribution of income and wealth. 7 By doing so, these models do not capture a fundamental reason for the development of securitization, i.e.…”

Macroprudential Policy in a Heterogeneous Environment—An Application of Agent-Based Approach in Systemic Risk Modelling

“…Impact studies of macroprudential policies on the economy within the ABM approach is relatively new. However, the topic refers to the tradition of agent-based models within financial markets [73][74][75][76][77] as well as literature on credit and financial markets from the agent-based perspective [72,[78][79][80][81][82][83][84][85][86][87][88][89][90][91][92][93][94][95][96][97]. In the broader sense, the study also refers to the coevolution models successfully applied in [98,99] to explain the stylized fact of persistency in a time series.…”

Job duration and inequality

“…Stock-flow consistency, which has witnessed increasing application in agent-based literature in recent years (e.g. Cincotti et al, 2010;Delli Gatti and Desiderio, 2015;Riccetti et al, 2015;Caiani et al, 2016;Dosi et al, 2017;Mazzocchetti et al, 2018), basically consists in the implementation of precise accounting rules, and is of particular importance to our scope as it provides a correct link between income and wealth.…”