Under Basel I, securitisation not only provided banks with plentiful cheap funding to lend, but also allowed banks to reduce the capital they required for the assets they sold to securitisation companies. This led to a spiral of increasing leverage in the banking and investor or shadow banking systems.
Key learning objectives:
What is money, and where does it come from?
How did the crisis impact Northern Rock?
How did Bank regulation impact ROE and leverage?
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