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Pooling, tranching, and credit expansion

Author

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  • 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 article builds a simple model of securitization that accounts for the foregoing retention strategies. Banks in the model retained the equity tranche as skin in the game to mitigate moral hazard concerns whilst they post the low-risk tranche as collateral 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.

Suggested Citation

  • Spiros Bougheas, 2014. "Pooling, tranching, and credit expansion," Oxford Economic Papers, Oxford University Press, vol. 66(2), pages 557-579.
    • Handle: RePEc:oup:oxecpp:v:66:y:2014:i:2:p:557-579.
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    File URL: http://hdl.handle.net/10.1093/oep/gpt029
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    Cited by:

    1. Bougheas, Spiros & Worrall, Tim, 2019. "Portfolio sales and signaling," Journal of Banking & Finance, Elsevier, vol. 99(C), pages 182-191.
    2. Sumit Agarwal & Brent W. Ambrose & Yildiray Yildirim & Jian Zhang, 2024. "Risk Retention Rules and the Issuance of Commercial Mortgage Backed Securities," The Journal of Real Estate Finance and Economics, Springer, vol. 68(4), pages 684-714, May.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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