Endnotes

¹Nadauld and Sherlund (2009) provide some empirical evidence on this relationship.

²Krugman (2007).

³See, for example, Securities and Exchange Commission (SEC 2008). BIS (2008a) also describes CDO markets from 2005 to 2007 in detail.

⁴Benmelech and Dlugosz (2009) discussed the ratings of CDO and related issues, focusing on collateralized loan obligations (CLOs).

⁵IMF (2008).

⁶In the one-factor Gaussian copula model, conditional independence is assumed.

⁷CDO structures, particularly their AAA tranches, are partly driven by investor demand, which is closely related to rating-dependent regulation. The relatively common view held is that an extensive use of credit ratings in the regulation of financial institutions created a natural clientele for CDO securities, especially for highly rated securities. The reliance on the ratings in evaluating financial risks should be reviewed by both individual institutions and regulatory authorities.

⁸Furthermore, the following are proposed: All advisers to hedge funds whose assets under management exceed some modest threshold should be required to register with the SEC under the Investment Advisers Act of 1940. The advisers should be required to report specific information on the funds they manage; this information should be sufficient to assess whether any fund poses a threat to financial stability.

⁹Aizenman (2009) provides theoretical analysis of the paradox of under- and over regulation.

¹⁰For example, in Japan, there were extensive and tight regulations of financial products and other detailed decisions by commercial banks until the late 1990s; however, these regulations could not prevent the creation of a bubble.

¹¹In November 2007, the data of the holdings of subprime-related assets by Japanese banks as of the end of September 2007 was released. Since then, this data has been released semiannually.

¹²See Fujii and Takemoto (2009).

¹³Covered bonds are debt instruments secured by a cover pool of mortgage loans to which investors have a preferential claim in the event of default. Legal requirements specify the safe nature of covered bonds.

¹⁴Procyclicality—which implies that over time, the dynamics of the financial system and of the real economy reinforce each other, thus increasing the amplitude of booms and busts and undermining stability in both the financial sector and the real economy—is another key issue of the macroprudential policy.

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