Securitization Sparks More Banking Crises, Government Interventions Ineffective
Banks strategically securitize assets to create opaque portfolios, leading to more banking crises. They borrow funds from investors for risky projects without knowing the outcome. By securitizing a fraction of their project, banks can control how investors use their information, causing information asymmetry. This increases the likelihood of banking crises and lowers welfare. Government interventions and bailout policies may worsen the situation by distorting banks' incentives.