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Incentives to Issue Low-Quality Securitized Products in the OTD Business Model

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  • Masazumi Hattori

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: masazumi.hattori@boj.or.jp))

  • Kazuhiko Ohashi

    (Professor, Hitotsubashi University (E-mail: kohashi@ics.hit-u.ac.jp))

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    Abstract

    We consider an economy in which a lender finances loans to borrowers by issuing a securitized product to investors and in which the credit quality of the product can depend on whether the lender screens borrowers. In the presence of asymmetric information between the lender and investors regarding the credit quality of potential borrowers, overvaluation from the lender's perspective can occur for low-quality securitized products, which inefficiently induces the lender not to screen borrowers and hence to issue the securitized products of low credit quality. This is likely to occur when the probability of being in a bad state (i.e., the presence of low-quality borrowers) is low, or when the seeds of recession begin emerging in a booming economy.

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    File URL: http://www.imes.boj.or.jp/research/papers/english/09-E-26.pdf
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    Bibliographic Info

    Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-26.

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    Date of creation: Nov 2009
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    Handle: RePEc:ime:imedps:09-e-26

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    Keywords: Originate-to-distribute; Securitization; Asymmetric information; Screening; Verification;

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    1. Jesus, Saurina & Gabriel, Jimenez, 2006. "Credit Cycles, Credit Risk, and Prudential Regulation," MPRA Paper 718, University Library of Munich, Germany.
    2. Berger, Allen N. & Udell, Gregory F., 2004. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 458-495, October.
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