IDEAS home Printed from https://ideas.repec.org/p/ime/imedps/09-e-26.html

Incentives to Issue Low-Quality Securitized Products in the OTD Business Model

Author

Listed:
  • Masazumi Hattori

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: masazumi.hattori@boj.or.jp))

  • Kazuhiko Ohashi

    (Professor, Hitotsubashi University (E-mail: kohashi@ics.hit-u.ac.jp))

Abstract

We consider an economy in which a lender finances loans to borrowers by issuing a securitized product to investors and in which the credit quality of the product can depend on whether the lender screens borrowers. In the presence of asymmetric information between the lender and investors regarding the credit quality of potential borrowers, overvaluation from the lender's perspective can occur for low-quality securitized products, which inefficiently induces the lender not to screen borrowers and hence to issue the securitized products of low credit quality. This is likely to occur when the probability of being in a bad state (i.e., the presence of low-quality borrowers) is low, or when the seeds of recession begin emerging in a booming economy.

Suggested Citation

  • Masazumi Hattori & Kazuhiko Ohashi, 2009. "Incentives to Issue Low-Quality Securitized Products in the OTD Business Model," IMES Discussion Paper Series 09-E-26, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:09-e-26
    as

    Download full text from publisher

    File URL: http://www.imes.boj.or.jp/research/papers/english/09-E-26.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
    2. Franklin Allen, Douglas Gale, 1988. "Optimal Security Design," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 229-263.
    3. Raghuram G. Rajan, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 399-441.
    4. Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(2‐3), pages 367-384, March.
    5. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
    6. Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 389-411, June.
    7. HyunSong Shin, 2009. "Securitisation and Financial Stability," Economic Journal, Royal Economic Society, vol. 119(536), pages 309-332, March.
    8. Gabriel Jiménez & Jesús Saurina, 2006. "Credit Cycles, Credit Risk, and Prudential Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
    9. Shin, Hyun Song, 2008. "Risk and liquidity in a system context," Journal of Financial Intermediation, Elsevier, vol. 17(3), pages 315-329, July.
    10. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," The Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
    11. Berger, Allen N. & Udell, Gregory F., 2004. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 458-495, October.
    12. Hyun Song Shin, 2009. "Securitisation and Financial Stability," Economic Journal, Royal Economic Society, vol. 119(536), pages 309-332, March.
    13. Ashcraft, Adam B. & Schuermann, Til, 2008. "Understanding the Securitization of Subprime Mortgage Credit," Foundations and Trends(R) in Finance, now publishers, vol. 2(3), pages 191-309, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alper Kara & Aydin Ozkan & Yener Altunbas, 2016. "Securitisation and banking risk: what do we know so far?," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 8(1), pages 2-16, June.
    2. Kara, A. & Marques-Ibanez, D. & Ongena, S., 2011. "Securitization and Lending Standards : Evidence from the Wholesale Loan Market," Other publications TiSEM ebfb7c18-fcea-4bc4-9ff1-5, Tilburg University, School of Economics and Management.
    3. 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.
    4. Affinito, Massimiliano & Tagliaferri, Edoardo, 2010. "Why do (or did?) banks securitize their loans? Evidence from Italy," Journal of Financial Stability, Elsevier, vol. 6(4), pages 189-202, December.
    5. Wilson, John O.S. & Casu, Barbara & Girardone, Claudia & Molyneux, Philip, 2010. "Emerging themes in banking: Recent literature and directions for future research," The British Accounting Review, Elsevier, vol. 42(3), pages 153-169.
    6. Spiros Bougheas, 2014. "Pooling, tranching, and credit expansion," Oxford Economic Papers, Oxford University Press, vol. 66(2), pages 557-579.
    7. Figueroa, Nicolás & Leukhina, Oksana & Ramírez, Carlos, 2021. "Imperfect information transmission from banks to investors: Macroeconomic implications," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 87-98.
    8. Brendan Daley & Brett Green & Victoria Vanasco, 2020. "Securitization, Ratings, and Credit Supply," Journal of Finance, American Finance Association, vol. 75(2), pages 1037-1082, April.
    9. Nodirbek Karimov & Alper Kara & Gareth Downing, 2021. "The impact of legal advisor‐issuer cooperation on securitization pricing," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 30(5), pages 167-199, December.
    10. Pagès, Henri, 2013. "Bank monitoring incentives and optimal ABS," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 30-54.
    11. Ebrahimi Kahou, Mahdi & Lehar, Alfred, 2017. "Macroprudential policy: A review," Journal of Financial Stability, Elsevier, vol. 29(C), pages 92-105.
    12. Mirza, Afrasiab & Stephens, Eric, 2022. "Securitization and aggregate investment efficiency," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    13. Helder Ferreira de Mendonça & Vívian Íris Barcelos, 2021. "Securitization of assets and risk transfer in a large emerging market: Evidence from Brazil," Bulletin of Economic Research, Wiley Blackwell, vol. 73(4), pages 580-605, October.
    14. Segura, Anatoli & Zeng, Jing, 2020. "Off-balance sheet funding, voluntary support and investment efficiency," Journal of Financial Economics, Elsevier, vol. 137(1), pages 90-107.
    15. Farruggio, Christian & Uhde, André, 2015. "Determinants of loan securitization in European banking," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 12-27.
    16. Li, Zhe & Sun, Jianfei, 2011. "Bank competition, securitization and risky investment," MPRA Paper 34173, University Library of Munich, Germany.
    17. Darrell Duffie, 2008. "Innovations in credit risk transfer: implications for financial stability," BIS Working Papers 255, Bank for International Settlements.
    18. Deku, Solomon Y. & Kara, Alper & Zhou, Yifan, 2019. "Securitization, bank behaviour and financial stability: A systematic review of the recent empirical literature," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 245-254.
    19. Ahn, Jung-Hyun & Breton, Régis, 2014. "Securitization, competition and monitoring," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 195-210.
    20. Carbó-Valverde, Santiago & Marques-Ibanez, David & Rodríguez-Fernández, Francisco, 2012. "Securitization, risk-transferring and financial instability: The case of Spain," Journal of International Money and Finance, Elsevier, vol. 31(1), pages 80-101.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ime:imedps:09-e-26. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kinken (email available below). General contact details of provider: https://edirc.repec.org/data/imegvjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.