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Financial intermediation theory and implications for the sources of value in structured finance markets

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  • Janet Mitchell

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    (National Bank of Belgium, Department of International Cooperation and Financial Stability)

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    Abstract

    Structured finance instruments represent a form of securitization technology which can be defined by the characteristics of pooling of financial assets, delinking of the credit risk of the asset pool from the credit risk of the originating intermediary, and issuance of tranched liabilities backed by the asset pool. Tranching effectively accomplishes a "slicing" of the loss distribution of the underlying asset pool. This paper reviews the finance literature relating to security design and securitization, in order to identify the economic forces underlying the creation of SF instruments. A question addressed is under what circumstances one would expect to observe pooling alone (as with traditional securitization) versus pooling and tranching combined (as with structured finance). It is argued that asymmetric information problems between an originator and investors can lead to pooling of assets and tranching of associated liabilities, as opposed to pooling alone. The more acute the problem of adverse selection, the more likely is value to be created through issuance of tranched assetbacked securities. Structured finance instruments also help to complete incomplete financial markets, and they may also appear in response to market segmentation.

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    File URL: http://www.nbb.be/doc/oc/repec/docwpp/WP71.pdf
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    Bibliographic Info

    Paper provided by National Bank of Belgium in its series Working Paper Document with number 71.

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    Length: 26 pages
    Date of creation: Jul 2005
    Date of revision:
    Handle: RePEc:nbb:docwpp:200507-1

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    Keywords: Structured finance; securitization;

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    References

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    Citations

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    Cited by:
    1. Joachim Keller, 2008. "Agency problems in structured finance – a case study of European CLOs," Working Paper Document 137, National Bank of Belgium.
    2. Blanchard, Olivier & Galí, Jordi, 2006. "A New Keynesian model with unemployment," CFS Working Paper Series 2007/08, Center for Financial Studies (CFS).
    3. Joseph Plasmans & Tomasz Michalak & Jorge Fornero, 2006. "Simulation, estimation and welfare implications of monetary policies in a 3-country NOEM model," Working Paper Research 94, National Bank of Belgium.
    4. Gann, Philipp, 2009. "Liquidität, Risikoeinstellung des Kapitalmarktes und Konjunkturerwartung als Preisdeterminanten von Collateralized Debt Obligations (CDOs) - Eine simulationsgestützte Analyse," Discussion Papers in Business Administration 10582, University of Munich, Munich School of Management.
    5. François Coppens & David Vivet, 2006. "The single European electricity market: A long road to convergence," Working Paper Document 84, National Bank of Belgium.

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