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Incentives and tranche retention in securitisation : a screening model

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  • Ingo Fender

    ()
    (Bank for International Settlements, Monetary and Economic Department)

  • Janet Mitchell

    ()
    (National Bank of Belgium, Financial Stability Department)

Abstract

This paper examines the power of different contractual mechanisms to influence an originator's choice of costly effort to screen borrowers when the originator plans to securitise its loans. The analysis focuses on three potential mechanisms: the originator holds a "vertical slice", or share of the portfolio; the originator holds the equity tranche of a structured finance transaction; the originator holds the mezzanine tranche, rather than the equity tranche. These mechanisms will result in differing levels of screening, and the differences arise from varying sensitivities to a systematic risk factor. Equity tranche retention is not always the most effective mechanism, and the equity tranche can be dominated by either a vertical slice or a mezzanine tranche if the probability of a downturn is likely and if the equity tranche is likely to be depleted in a downturn. If the choice of how much and what form to retain is left up to the originator, the retention mechanism may lead to low screening effort, suggesting a potential rationale for government intervention

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File URL: http://www.nbb.be/doc/oc/repec/reswpp/wp177En.pdf
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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 177.

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Length: 50 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:nbb:reswpp:200910-16

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Keywords: securitisation; retention requirements; tranching; screening incentives;

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References

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  1. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
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  3. Adam B. Ashcraft & Til Schuermann, 2008. "Understanding the securitization of subprime mortgage credit," Staff Reports 318, Federal Reserve Bank of New York.
  4. Ingo Fender & Janet Mitchell, 2005. "Structured finance : complexity, risk and the use of ratings," Financial Stability Review, National Bank of Belgium, vol. 3(1), pages 127-135, June.
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  13. Krahnen, Jan Pieter & Wilde, Christian, 2006. "Risk Transfer with CDOs and Systemic Risk in Banking," CEPR Discussion Papers 5618, C.E.P.R. Discussion Papers.
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Cited by:
  1. Gürtler, Marc & Hibbeln, Martin, 2012. "How smart are investors after the subprime mortgage crisis? Evidence from the securitization market," Working Papers IF39V1, Technische Universität Braunschweig, Institute of Finance.
  2. Kiff, John & Kisser, Michael, 2011. "A Shot at Regulating Securitization," Discussion Papers 2011/7, Department of Business and Management Science, Norwegian School of Economics.
  3. Pagès, Henri, 2013. "Bank monitoring incentives and optimal ABS," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 30-54.
  4. Cerasi, Vittoria & Rochet, Jean-Charles, 2014. "Rethinking the regulatory treatment of securitization," Journal of Financial Stability, Elsevier, vol. 10(C), pages 20-31.
  5. Sarkisyan, Anna & Casu, Barbara, 2013. "Retained interests in securitisations and implications for bank solvency," Working Paper Series 1538, European Central Bank.
  6. Spiros Bougheas, . "Pooling, Tranching and Credit Expansion," Discussion Papers 12/10, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  7. Allen B Frankel, 2009. "The risk of relying on reputational capital: a case study of the 2007 failure of New Century Financial," BIS Working Papers 294, Bank for International Settlements.
  8. Pagès, H., 2009. "Bank incentives and optimal CDOs," Working papers 253, Banque de France.
  9. Bobek, Andreas & Bohm, Thomas & Neuner, Stefan & Paintner, Sandra & Schmeußer, Stefanie & Waldvogel, Felix, 2011. "Ökonomische Analyse europäischer Bankenregulierung: Verbriefung und Interbankenmarkt im Fokus," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2011-01, University of Bayreuth, Chair of Finance and Banking.
  10. Scholz, Julia, 2011. "Manager- und transaktionsspezifische Determinanten der Performance von Arbitrage CLOs," Discussion Papers in Business Administration 12144, University of Munich, Munich School of Management.
  11. Sara Malekan & Georges Dionne, 2012. "Securitization and Optimal Retention under Moral Hazard," Cahiers de recherche 1221, CIRPEE.

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