Confidence banking and strategic default

Securitization relies on confidence. As securities are tied to a particular asset (or pool of assets), and investors lose when the asset defaults, the security issuer usually provides further coverage by promising to use the proceedings from other, non-securitized, assets. Although these promises are difficult to enforce, the issuer may still have incentives to strategically avoid default in order to build a reputation of holding high-quality assets. Confidence makes securitization more dependent on the issuer’s reputation than other forms of financing and more volatile to forces behind reputation concerns, such as expectations about future profits.