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Rethinking the regulatory treatment of securitization

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  • Cerasi, Vittoria
  • Rochet, Jean-Charles

Abstract

In a model where banks play an active role in monitoring borrowers, we analyze the impact of securitization on bankers’ incentives across different macroeconomic scenarios. We show that securitization can be part of the optimal financing scheme for banks, provided banks retain an equity tranche in the sold loans to maintain proper incentives. In economic downturns however securitization should be restricted. The implementation of the optimal solvency scheme is achieved by setting appropriate capital charges through a form of capital insurance, protecting the value of bank capital in downturns, while providing additional liquidity in upturns.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 10 (2014)
Issue (Month): C ()
Pages: 20-31

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Handle: RePEc:eee:finsta:v:10:y:2014:i:c:p:20-31

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Web page: http://www.elsevier.com/locate/jfstabil

Related research

Keywords: Solvency regulation; Securitization; Capital insurance; Monitoring;

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References

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Cited by:
  1. Jiranyakul, Komain & Opiela, Timothy, 2014. "Market Discipline at Thai Banks before the Asian Crisis," MPRA Paper 54492, University Library of Munich, Germany.

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