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Securitization and moral hazard: Does security price matter?

  • Liu, Luke
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This article analyses the effect of security price on the behaviour of bank securitization. We present a model of bank securitization in which security price together with liquid constraints create the incentive for banks to originate and sell assets backed securities to investors. Banks have a comparative advantage in locating and screening projects within their locality. Our results show that under the buyer’s market pricing mechanism the banks with different liquidity constraints can share the risk and the moral hazard problem is not serious; but under the seller’s market pricing mechanism the banks have the incentive to conduct strategic securitization and the moral hazard problem is serious. Our main idea has been supported by the subprime crisis broke in the US in 2007.

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File URL: https://mpra.ub.uni-muenchen.de/35004/1/MPRA_paper_35004.pdf
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File URL: https://mpra.ub.uni-muenchen.de/38016/1/MPRA_paper_38016.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35004.

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Date of creation: 19 May 2011
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Handle: RePEc:pra:mprapa:35004
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  2. Gary Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," Yale School of Management Working Papers amz2358, Yale School of Management, revised 01 Sep 2009.
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  7. Rohit Rahi, 1993. "Adverse selection and security design," Economics Working Papers 64, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 1994.
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  17. Steven N. Kaplan & Jeremy C. Stein, 1993. "THE EVOLUTION OF BUYOUT PRICING AND FINANCIAL STRUCTURE (OR, WHAT WENT WRONG) IN THE 1980s," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(1), pages 72-88.
  18. Wagner, Wolf & Marsh, Ian W., 2006. "Credit risk transfer and financial sector stability," Journal of Financial Stability, Elsevier, vol. 2(2), pages 173-193, June.
  19. Joao Tovar Jalles, 2009. "Do Oil Prices Matter? The Case of a Small Open Economy," Annals of Economics and Finance, Society for AEF, vol. 10(1), pages 65-87, May.
  20. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1449-1496, November.
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