One of the defining characteristics of banks is that they borrow short and lend long. Following Diamond and Dybvig's seminal work (Diamond and Dybvig (1983)) most of the banking literature has tended to focus on the liquidity implications of such a maturity transformation function. The maturity mismatch or more precisely the repricing mismatch is also the key source of interest rate risk in the banking book.
The financial crises of the late 1990s may have marked a watershed for the global economy. Although neither the United States nor the European Union or Japan were severely affected by the crises in Asia, Latin America and Russia, they have changed our understanding of the most appropriate economic policies in particular for developing countries. After the crises, the emphasis is different: Before 1997, the concepts of deregulation and reduced influence of governments seemed to enjoy majority support not only in the G 7-countries, but also in the developing world. Achieving high growth rates was the single most important aim of economic policy. Today, policy makers have to meet other goals of equal importance: In particular in the developing world, economic policy has to provide mechanisms against severe financial crises.
In this paper, I will argue that at the beginning of the 21 st century monetary regionalism provides a plausible and potentially beneficial option for economic policy in some regions of the world, particularly for East Asia and Latin America. Monetary regionalism offers solutions that conventional regionalism has not been able to provide: Conventional regionalism is based on trade integration and does not increase the monetary and financial linkages between participating economies until they reach quite a high level of integration. It has taken the European Union more than 40 years until such a level was reached and a common currency could have been created. In the meantime, the countries participating in a conventional integration project do not enjoy additional protection against financial crises: Neither with regard to the stabilisation of the exchange rate of their currencies nor with regard to the stabilisation of capital flows do conventional integration schemes strengthen the economies of their member states. Furthermore, the creation of a traditional integration scheme can make countries politically more vulnerable. This is particularly so in East Asia: The creation of a free trade area, customs union or common market would provide ammunition for American Senators in the event of a recession in the US. Asian countries could be accused of closing their own markets, but simultaneously benefiting from the open American market. Needless to say that this cannot be a tempting prospect for policy makers in East Asia or Latin America.
Residential mortgage loans are currently experiencing historically high levels of defaults and foreclosures, and many borrowers have lost their homes. As a result, lenders and government sponsored entities have announced widespread loan modification or guarantee programs in recent months designed to limit foreclosures and keep homeowners in their homes. Some of these programs apply to securitized loans, while others currently do not.
Securitized loans are often perceived as more difficult to modify than portfolio loans because of contractual provisions in securitization servicing agreements that limit or restrict the ability of servicers to modify securitized loans. In addition, servicers must consider the interests of a securitization trust as a whole in dealing with problem loans, notwithstanding the different classes of investors and their differing interests. Senior investors may favor foreclosures because they recover principal even if the junior investors take a large loss on a foreclosed loan. Conversely, junior investors may favor modifications because they are first in line to absorb losses from foreclosures. These differing interests, as well as servicer concerns about adherence to contractual limitations, have made it more difficult for servicers to pursue widespread modification programs with respect to securitized loans.
