Rethinking the Regulatory Treatment of Securitization
36 Pages Posted: 23 Jul 2008 Last revised: 8 Jun 2013
Date Written: July 1, 2008
In a model where banks play an active role in monitoring borrowers, we analyze the impact of securitization on bankers incentives across different macroeconomic scenarios. We show that securitization can be part of the optimal financing scheme for banks, provided banks retain an equity tranche in the sold loans to maintain proper incentives. In economic downturns however securitization should be restricted. The implementation of the optimal solvency scheme is achieved by setting appropriate capital charges through a form of capital insurance, protecting the value of bank capital in downturns, while providing additional liquidity in upturns.
Keywords: solvency regulation, securitization, capital insurance, monitoring
JEL Classification: G21, G38
Suggested Citation: Suggested Citation