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Loss Allocation in Securitization Transactions


  • Günter Franke

    () (Department of Economics, University of Konstanz, Germany)

  • Markus Herrmann

    () (Landesbank Baden-Württemberg, Germany)

  • Thomas Weber

    () (Axpo Holding AG (Baden) Aargau, Switzerland)


This paper analyses the loss allocation to First, Second and Third Loss Positions in European collateralized debt obligation transactions. The quality of the underlying asset pool plays a predominant role for the loss allocation. A lower asset pool quality induces the originator to take a higher First Loss Position, but, in a synthetic transaction, a smaller Third Loss Position. The share of expected default losses, borne by the First Loss Position, is largely independent of asset pool quality, but lower in securitizations of corporate loans than in those of corporate bonds. Originators with a good rating and low Tobin´s Q prefer synthetic transactions.

Suggested Citation

  • Günter Franke & Markus Herrmann & Thomas Weber, 2011. "Loss Allocation in Securitization Transactions," Working Paper Series of the Department of Economics, University of Konstanz 2011-22, Department of Economics, University of Konstanz.
  • Handle: RePEc:knz:dpteco:1122

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    Cited by:

    1. Wilde, Christian & Krahnen, Jan Pieter, 2017. "Skin in the game in ABS transactions: A critical review of policy options," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168296, Verein für Socialpolitik / German Economic Association.
    2. Guo, Guixia & Wang, Frank Yong & Wei, Xu, 2014. "Optimal tranching with diverse beliefs," Economics Letters, Elsevier, vol. 124(2), pages 222-226.
    3. Wojtowicz, Marcin, 2014. "CDOs and the financial crisis: Credit ratings and fair premia," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 1-13.
    4. Krahnen, Jan Pieter & Wilde, Christian, 2017. "Skin-in-the-game in ABS transactions: A critical review of policy options," SAFE White Paper Series 46, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.

    More about this item


    Securitization; collateralized debt obligations; asset pool quality; First Loss Position; synthetic transactions.;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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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