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Securitized Banking, Asymmetric Information, and Financial Crisis: Regulating Systemic Risk Away

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  • Sudipto Bhattacharya
  • Georgy Chabakauri
  • Kjell G. Nyborg

Abstract

We develop a model of securitized (Originate, then Distribute) lending, in which both publicly observed aggregate shocks to values of securitized loan portfolios, and later some asymmetrically observed discernment of varying qualities of subsets thereof, play crucial roles. We nd that originators and potential buyers of such assets may di er in their preferences over their timing of trades, leading to a reduction in the aggregate surplus accruing from securitization. In addition, heterogeneity in sellers' selected timing of trades { arising from di erences in their ex ante beliefs { coupled with initial leverage choices based on pre-shock prices, may lead to nancial crises, implying uncoordinated asset liquidations inconsistent with any inter-temporal market equilibrium. We consider and contrast two mitigating regulatory interventions: leverage restrictions, and ex ante speci ed resale price guarantees on securitized asset portfolios. We show that the latter tool performs strictly better than the former, by ensuring not only bank survival, but also enhanced social surplus arising from securitized lending. It does so by inducing a more coordinated market equilibrium, that does not lead to interim leverage buildup to support a \cherry picking" seller trading strategy.

Suggested Citation

  • Sudipto Bhattacharya & Georgy Chabakauri & Kjell G. Nyborg, 2012. "Securitized Banking, Asymmetric Information, and Financial Crisis: Regulating Systemic Risk Away," FMG Discussion Papers dp704, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp704
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp704-AXA10.pdf
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    References listed on IDEAS

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    1. Nicola Gennaioli & Andrei Shleifer & Robert W. Vishny, 2013. "A Model of Shadow Banking," Journal of Finance, American Finance Association, vol. 68(4), pages 1331-1363, August.
    2. Heider, F. & Hoerova, M. & Holthausen, C., 2009. "Liquidity Hoarding and Interbank Market Spreads : The Role of Counterparty Risk," Discussion Paper 2009-40 S, Tilburg University, Center for Economic Research.
    3. Viral V. Acharya & Hyun Song Shin & Tanju Yorulmazer, 2011. "Crisis Resolution and Bank Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2166-2205.
    4. V.V. Chari & Ali Shourideh & Ariel Zetlin-Jones, 2010. "Adverse Selection, Reputation and Sudden Collapses in Secondary Loan Markets," NBER Working Papers 16080, National Bureau of Economic Research, Inc.
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