Financial Innovation and Financial Stability:A Comparative Analysis Of Mortgage Loan Securitization in the U.S. and Europe

The originate-to-distribute model of the U.S.mortgage loan securitization was too complex and lack of appropriate regulation,leading to a severe mismatch between risk assumed and return enjoyed by lending institutions.This is one of the key reasons for the outbreak of sub-prime crisis.In sharp contrast,the issuance of covered bonds,a major instrument for mortgage financing in European countries,is much more positive to financial stability.This paper analyzes the linkage between excess mortgage securitization and financial crisis in the U.S.,compares the different models of securitization in the U.S.and Europe,documents new developments in both markets after the crisis,and finally,provides brief conclusions and reflections.