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The Functional Importance of Asset Backed Securities

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An Assessment and Some Policy Implications

Asset backed securities have become a permanent feature of the global financial sy s tem. A major reason for this are the gaps in the bond market . These, in turn, stem from the fact that government and corporate bond supplies typically fluctuat e over the business cycle , while the institutional investor demands for these bonds as stores of value are monot on ically increasing in line with the continu a l increase in fund inflows from household savers. This paper argues that one of the major functions of asset b acked securities is to help t o b ridge the se bond supply - demand gaps . Drawing on lessons from the financial crisis, the paper goes on to spell out some policy implications of the as yet, poorly recognised functional importance of asset backed securities in the contemporary era.