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Rethinking the regulatory treatment of securitization

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Listed author(s):
  • Cerasi, Vittoria
  • Rochet, Jean-Charles

Abstract

In a model where banks play an active role in monitoring borrowers, we analyze the impact of securitization on bankers’ incentives across different macroeconomic scenarios. We show that securitization can be part of the optimal financing scheme for banks, provided banks retain an equity tranche in the sold loans to maintain proper incentives. In economic downturns however securitization should be restricted. The implementation of the optimal solvency scheme is achieved by setting appropriate capital charges through a form of capital insurance, protecting the value of bank capital in downturns, while providing additional liquidity in upturns.

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File URL: http://www.sciencedirect.com/science/article/pii/S1572308912000629
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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 10 (2014)
Issue (Month): C ()
Pages: 20-31

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Handle: RePEc:eee:finsta:v:10:y:2014:i:c:p:20-31
DOI: 10.1016/j.jfs.2012.10.002
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

Keywords: Solvency regulation; Securitization; Capital insurance; Monitoring;

Find related papers by JEL classification:

  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
  • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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Cited by:

  1. Vittoria Cerasi & Tommaso Oliviero, 2014. "Managerial compensation, regulation and risk in banks: theory and evidence from the financial crisis," Working Papers 279, University of Milano-Bicocca, Department of Economics, revised Jul 2014.
  2. Afrasiab Mirza & Eric Stephens, 2016. "Securitization and Aggregate Investment Efficiency," Carleton Economic Papers 16-05, Carleton University, Department of Economics, revised 24 Jan 2017.
  3. Jiranyakul, Komain & Opiela, Timothy, 2014. "Market Discipline at Thai Banks before the Asian Crisis," MPRA Paper 54492, University Library of Munich, Germany.
  4. Kara, Alper & Marques-Ibanez, David & Ongena, Steven, 2016. "Securitization and lending standards: Evidence from the European wholesale loan market," Journal of Financial Stability, Elsevier, vol. 26(C), pages 107-127.

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