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Discrete Dynamics in Nature and Society
Volume 2013 (2013), Article ID 439305, 19 pages
http://dx.doi.org/10.1155/2013/439305
Research Article

Basel III and Asset Securitization

Faculty of Commerce & Administration, North-West University (Mafikeng Campus), Private Bag x2046, Mmabatho 2735, South Africa

Received 14 June 2013; Revised 28 September 2013; Accepted 30 September 2013

Academic Editor: Oswaldo Luiz do Valle Costa

Copyright © 2013 M. Mpundu et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Asset securitization via special purpose entities involves the process of transforming assets into securities that are issued to investors. These investors hold the rights to payments supported by the cash flows from an asset pool held by the said entity. In this paper, we discuss the mechanism by which low- and high-quality entities securitize low- and high-quality assets, respectively, into collateralized debt obligations. During the 2007–2009 financial crisis, asset securitization was seriously inhibited. In response to this, for instance, new Basel III capital and liquidity regulations were introduced. Here, we find that we can explicitly determine the transaction costs related to low-quality asset securitization. Also, in the case of dynamic and static multipliers, the effects of unexpected negative shocks such as rating downgrades on asset price and input, debt obligation price and output, and profit will be quantified. In this case, we note that Basel III has been designed to provide countercyclical capital buffers to negate procyclicality. Moreover, we will develop an illustrative example of low-quality asset securitization for subprime mortgages. Furthermore, numerical examples to illustrate the key results will be provided. In addition, connections between Basel III and asset securitization will be highlighted.