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Securitization is not that evil after all

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  • Ugo Albertazzi
  • Ginette Eramo
  • Leonardo Gambacorta
  • Carmelo Salleo

Abstract

A growing number of studies on the US subprime market indicate that, due to asymmetric information, credit risk transfer activities have perverse effects on banks' lending standards. We investigate a large part of the market for securitized assets ("prime mortgages") in Italy, a country with a regulatory framework analogous to the one prevalent in Europe. Information on over a million mortgages consists of loan-level variables, characteristics of the originating bank and, most importantly, contractual features of the securitization deal, including the seniority structure of the ABSs issued by the Special Purpose Vehicle and the amount retained by the originator. We borrow a robust way to test for the effects of asymmetric information from the empirical contract theory literature (Chiappori and Salanié, 2000). Overall, our evidence suggests that banks can effectively counter the negative effects of asymmetric information in the securitization market by selling less opaque loans, using signaling devices (i.e. retaining a share of the equity tranche of the ABSs issued by the SPV) and building up a reputation for not undermining their own lending standards.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 341.

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Length: 60 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:bis:biswps:341

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Keywords: securitization; asymmetric information; signaling; reputation;

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Cited by:
  1. Blaise Gadanecz & Alper Kara & Philip Molyneux, 2011. "The value of repeat lending," BIS Working Papers 350, Bank for International Settlements.
  2. Sarkisyan, Anna & Casu, Barbara, 2013. "Retained interests in securitisations and implications for bank solvency," Working Paper Series, European Central Bank 1538, European Central Bank.

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