The Subprime Crisis And Credit Derivative Transactions: In The Perspective Of New Institutional Economics

This thesis studies the relationship between the subprime crisis and complex credit derivative transactions (hereinafter referred to as CDTs) under an institutional economics perspective of debt governance structure.In the past 30 years, credit assets transaction has evolved into an indispensible part of financial market, along with innovations on transaction institution and financial instrument. Credit assets transactions result in transfer (or partly transfer) of property rights and transform the credit governance structure in the initial state. Credit assets transactions generally involve new structural arrangements on transaction cost and allocation of risk premium between creditors bounded together through transactions. These arrangements shape up a series of complicated transaction system, which is categorized as CDTs institutional system because they rely on fundamental commercial banking credit and create similar multi-principal-agent relationships. In a narrow sense, CDTs refer to transactions of credit assets on the balance sheet of a commercial bank, synonymous to credit assets transaction; in a broad sense, CDTs should also include commercial bank's on-balance and off-balance sheet transactions, as well as other types of swaps of right and obligation based on credit derivatives of commercial banks. We treat CDTs in the broad sense in this thesis. Further,according to the observation of agent's behavior,we classify CDTs to simple CDTs and complex CDTs.The rapid development of CDTs has dramatically changed the operation of financial market, the behavior of market participants, as well as the market risk. More importantly, CDTs has reformed the routine governance structure of debt, proposing a new challenge to the traditional theories of financial intermediation, which claim that deposit contracts provide banks the optimal incentive under information asymmetry. CDTs institutional system optimizes bank's incentive and improves market efficiency by substituting contract of alternative forms for deposits contract. Similar to the conventional theories of financial intermediation, in particular the study on basic credit behaviors, researches on CDTs pay much attention to transaction cost all along the exploration in this field. But unlike the traditional theories which focus on the optimal equilibrium among borrower, creditor and depositor under the non-competitive condition, CDTs theory studies efficiency improvement and costs allocation in a competitive credit market. From this point of view, studies on CDTs institutional system are both an inheritance and an extension of the theories of financial intermediation.In general, present literature on CDTs is filled with researches on particular types of derivative transactions, but lack of systematic and comprehensive reviews of this field. Conventional research on CDTs, meanwhile, mostly adopt the routine hypothesis of financial intermediation that commercial bank finance indirectly in an 'Originate-and-hold'mode, which is counterfactual and out-of-date. The evolving process and burgeoning characteristics of CDTs, especially after 1990's, make it imperative to study the current CDTs in detail. The global economic recession triggered by the subprime crisis is a landmark in the development of CDTs theories, bringing the theory and practice back to the asymmetric information paradigm. Researchers now should not be satisfied with explaining the crisis with available theories, but should look through the phenomenon to advance innovative and practical perspectives and methodologies to improve the existing theories.The core function of CDTs, which is defined by derivative debt governance, is to construct a more efficient and low-cost debt governance by encouraging market entries with comparative advantages in information or financing cost, achieving Pareto improvement in credit market and macro-economy. Hence, CDTs firstly is a kind of institution in essence, and the studies of derivative transaction should be regarded as institutional economics. Secondly, CDTs is a type of governance mechanism in the hierarchical theory of institutional evolution. Thus governance structure analysis should be an important perspective of the research on the efficiency of CDTs institution. Thirdly, agency problem is the crux of the arrangement of governance structure.Moreover, credit market governance is a complicated system consisting of capital allocation mechanism, ex-ante screening mechanisms, ex-post controlling mechanism, and risk-premium allocation mechanism. Therefore an effective incentive mechanism provides an important base for the steady operation of credit market. Usually, two kinds of incentive modes-property right incentive and contract incentive-exist in credit market. The prerequisites of the former include integrity, perspicuity, and exclusiveness, while a punishing strategy contingent on the observation of agent's behavior guarantees the effectiveness of contract incentive. Property rights incentive and contract incentive are mutually substitutable. In the process of a complex CDTs, the fission of initial property rights bundle would influence the effectiveness of derivative credit property rights via the communication channel of "property rights composition-property rights nature-property rights function", and affect the steadiness of new credit governance structure. Specifically, factors that undermine the steadiness of complex derivative transaction governance structure are mainly the following:First, it is very difficult to provide a contract incentive for the credit-issuing institutions or asset management institutions to select the optimal actions due to deficiency of perceivable and indicative information.Second, complex derivative transactions lead to a structural fission of initial property rights bundle. Derivative property rights belong to mutually independent market entities in the new governance structure, and ultimately result in fragmentation of derivative property rights and unsteadiness of credit governance structure in the reallocating process of rights and responsibilities and interests.Third, the information strategy of credit-issuing institution and asset management institution depend on their complicated utility functions, which create externality of role conflicts, as they screen and control as the credit-issuers and potential beneficiaries. Under the current business confidential principle, the strategy possibly causes damage to the interest of other stakeholders.What's the real cause of the subprime crisis? On one hand, complex derivative transactions in an extensive global capital network generated a huge credit supply to drive up the U.S. housing market. On the other hand, complex CDTs led to the fission of credit assets property rights and the birth of new derivative property rights. Consequently the incompleteness of contract and the fragmentation of derivative property rights weakened the steadiness of credit governance structure, breeding the crisis.Hence, the reform of CDTs institutional system should entail a new order of international economy, a revision of international monetary system, an amendment of the endogenous incentive of CDTs institution, and an improvement of the international co-operation mechanism. In the meantime, with a rapidly growing economy, China stages up in the grand era of economic globalization and financial innovation. It's compelling for China to establish a sound CDTs institutional system to further its economic growth. China's policy makers should treat carefully the relationship between CDTs and the reform of financial system, foster a healthy environment for the development of the CDTs institutional system, improve the efficiency of market and the governance structure, and enhance the macro-management and regulation of CDTs.