Nonrecourse Financing and Securitization
Kyoto University - Institute of Economic Research
April 2, 2012
Journal of Financial Intermediation 21 (2012) 659-693
We consider the role of the nonrecourse financing of securitization by a financial institution (FI). Our model suggests that even though the FI has the opportunity to provide liquidity support afterward, it is optimal for the FI to use the nonrecourse financing of securitization initially, because the nonrecourse security makes liquidation of the original asset more attractive for an FI that knows that the original asset is bad. However, our model also predicts that the nonrecourse financing of securitization, together with short-term maturity financing, forces the financial system to perform inefficiently in handling troubled loans and causes problems with inefficient liquidity support and overinvestment under certain conditions, despite the nonrecourse property of securitization. The theoretical results provide empirical implications for recent problems with securitized and structured finance in the United States and Europe.
Number of Pages in PDF File: 58
Keywords: asset-backed securities, financial distress, liquidity, maturity mismatch, structured finance
JEL Classification: D82, D86, G21, G23, G24, G33
Date posted: April 4, 2012 ; Last revised: August 31, 2012
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