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Securitization is not that evil after all

  • Ugo Albertazzi

    ()

    (Bank of Italy)

  • Ginette Eramo

    ()

    (Bank of Italy)

  • Leonardo Gambacorta

    ()

    (Bank for International Settlements)

  • Carmelo Salleo

    ()

    (European Systemic Risk Board Secretariat)

A growing number of studies on the US subprime market indicate that, due to asymmetric information, credit risk transfer activities have perverse effects on banks� lending standards. We investigate a large part of the market for securitized assets (�prime mortgages�) in Italy, a country with a regulatory framework analogous to the one prevalent in Europe. Information on over a million mortgages consists of loan-level variables, characteristics of the originating bank and, most importantly, contractual features of the securitization deal, including the seniority structure of the ABSs issued by the Special Purpose Vehicle and the amount retained by the originator. We borrow a robust way to test for the effects of asymmetric information from the empirical contract theory literature (Chiappori and Salani�, 2000). Overall, our evidence suggests that banks can effectively counter the negative effects of asymmetric information in the securitization market by selling less opaque loans, using signaling devices (i.e. retaining a share of the equity tranche of the ABSs issued by the SPV) and building up a reputation for not undermining their own lending standards.

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File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2011/2011-0796/en_tema_796.pdf
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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 796.

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Date of creation: Feb 2011
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Handle: RePEc:bdi:wptemi:td_796_11
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Web page: http://www.bancaditalia.it

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