The Impact of Skin in the Game on Moral Hazard in the Securitization Market

51 Pages Posted: 26 Feb 2020 Last revised: 27 Mar 2024

See all articles by Martin Thomas Hibbeln

Martin Thomas Hibbeln

University of Duisburg-Essen - Mercator School of Management

Werner Osterkamp

University of Duisburg-Essen - Mercator School of Management

Date Written: March 15, 2024

Abstract

Based on European RMBS deals with 24 million quarterly loan observations, we examine the effect of risk retention on bank behavior. Using OLS, propensity score matching, and instrumental variable regressions, we examine why retention deals perform better. Analyzing monitoring effort and the workout process, we find that the probability of rating updates or collateral revaluations is higher, and the rating quality is better. Retention loans have a lower probability of becoming non-performing, a lower delinquency amount, and a shorter time in arrears. Moreover, non-performing and defaulted retention loans are more likely to recover. We observe that total losses are lower for deals with retention, which are driven by lower default rates, lower exposures at default, and higher recovery rates. Overall, our results suggest that retention reduces moral hazard and incentivizes banks to exert higher effort, which results in superior securitized asset performance.

Keywords: security design, asset-backed securities, retention, moral hazard, monitoring

JEL Classification: D82, G01, G21

Suggested Citation

Hibbeln, Martin Thomas and Osterkamp, Werner, The Impact of Skin in the Game on Moral Hazard in the Securitization Market (March 15, 2024). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3528090 or http://dx.doi.org/10.2139/ssrn.3528090

Martin Thomas Hibbeln (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany
+49 203 379-2830 (Phone)

Werner Osterkamp

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

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