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A Shot at Regulating Securitization (Kisser M., Kiff J.)

Bank Lending Bank Products and Diversification Information Asymmetry and Transparency Regulation Risk-taking and Risk Management

Abstract This paper investigates the incentives of a loan originating bank to screen borrowers and retain skin in the game in case it has the option to sell the loan portfolio as a structured product to outside investors. Introducing accounting frictions, reduced form informational asymmetries and systemic risk, it is shown that equity tranche retention best incentivizes loan screening but mezzanine tranche retention mostly maximizes profits due to lower capital charges, loan screening costs and lower retention. That is, a profit maximizing bank would mostly choose to retain the mezzanine tranche. The difference gets even more pronounced in case of a favorable economic outlook as mezzanine tranche retention then allows the bank to save on both screening costs and capital charges. Active policy recommendations should therefore take the impact of loan screening costs and the business cycle into account.
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Libref/ Kisser M., Kiff J. (2011) "A Shot at Regulating Securitization", NHH Dept. of Finance & Management Science Discussion Paper, pp. 1 - 36
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