Advanced Search
MyIDEAS: Login

Pooling, Tranching and Credit Expansion

Contents:

Author Info

  • Spiros Bougheas

Abstract

Traditionally banks have used securitization for expanding credit and thus their profitability. It has been well documented that, at least before the 2008 crisis, many banks were keeping a high proportion of the securities that they created on their own balance-sheets. Those securities retained included both the high-risk ‘equity’ tranche and the low-risk AAA-rated tranche. This paper builds a simple model of securitization that accounts for the above retention strategies. Banks in the model retained the equity tranche as skin in the game in order to mitigate moral hazard concerns while they post the low-risk tranche as collateral in order to take advantage of the yield curve. When variations in loan quality are introduced the predicted retention strategies match well those found in empirical studies.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-06/cesifo1_wp3859.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3859.

as in new window
Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:ces:ceswps:_3859

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords: securitization; tranching; credit expansion;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 415-32, July.
  2. Ingo Fender & Janet Mitchell, 2009. "Incentives and tranche retention in securitisation: a screening model," BIS Working Papers 289, Bank for International Settlements.
  3. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  4. Dell’Ariccia, G. & Igan, D. & Laeven, L., 2009. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Discussion Paper 2009-46 S, Tilburg University, Center for Economic Research.
  5. Berndt, Antje & Gupta, Anurag, 2009. "Moral hazard and adverse selection in the originate-to-distribute model of bank credit," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 725-743, July.
  6. Benmelech, Efraim & Dlugosz, Jennifer & Ivashina, Victoria, 2012. "Securitization without adverse selection: The case of CLOs," Journal of Financial Economics, Elsevier, vol. 106(1), pages 91-113.
  7. Glaeser, Edward L. & Kallal, Hedi D., 1997. "Thin Markets, Asymmetric Information, and Mortgage-Backed Securities," Journal of Financial Intermediation, Elsevier, vol. 6(1), pages 64-86, January.
  8. Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  10. Acharya, Viral V. & Gale, Douglas M & Yorulmazer, Tanju, 2009. "Rollover Risk and Market Freezes," CEPR Discussion Papers 7122, C.E.P.R. Discussion Papers.
  11. Demirguc-Kunt, Asli & Huizinga, Harry, 2009. "Bank activity and funding strategies : the impact on risk and returns," Policy Research Working Paper Series 4837, The World Bank.
  12. George Pennacchi, . "Loan Sales and the Cost of Bank Capital," Rodney L. White Center for Financial Research Working Papers 7-87, Wharton School Rodney L. White Center for Financial Research.
  13. Keys, Benjamin J. & Mukherjee, Tanmoy & Seru, Amit & Vig, Vikrant, 2009. "Financial regulation and securitization: Evidence from subprime loans," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 700-720, July.
  14. Shleifer, Andrei & Vishny, Robert W., 2010. "Unstable banking," Journal of Financial Economics, Elsevier, vol. 97(3), pages 306-318, September.
  15. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
  16. Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 389-411, June.
  17. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  18. Christine A. Parlour & Guillaume Plantin, 2008. "Loan Sales and Relationship Banking," Journal of Finance, American Finance Association, vol. 63(3), pages 1291-1314, 06.
  19. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Financial Innovation and Financial Fragility," Working Papers 2010.114, Fondazione Eni Enrico Mattei.
  20. Chris Downing & Dwight Jaffee, 2009. "Is the Market for Mortgage-Backed Securities a Market for Lemons?," Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2257-2294, July.
  21. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  22. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
  23. Cem Demiroglu & Christopher James, 2012. "How Important is Having Skin in the Game? Originator-Sponsor Affiliation and Losses on Mortgage-backed Securities," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3217-3258.
  24. Riddiough, Timothy J., 1997. "Optimal Design and Governance of Asset-Backed Securities," Journal of Financial Intermediation, Elsevier, vol. 6(2), pages 121-152, April.
  25. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
  26. Charles W. Calomiris, 2009. "Financial Innovation, Regulation, and Reform," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 65-91, Winter.
  27. Andreas A. Jobst, 2002. "Collateralized Loan Obligations (CLOs) – A Primer," Working Paper Series: Finance and Accounting 96, Department of Finance, Goethe University Frankfurt am Main.
  28. Gabriella Chiesa, 2008. "Optimal Credit Risk Transfer, Monitored Finance, and Banks," EIEF Working Papers Series 0811, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2008.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3859. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.