20 Pages Posted: 21 Apr 2010 Last revised: 22 Feb 2017
Date Written: January 19, 2017
We propose a framework under which one can analyze bank's securitization program in terms of firm value, leverage, and dividend payout. Our contributions are two-fold: (1) we provide an easy-to-use measure to see how the proceeds from asset sales are used, in particular focusing on the bank's leverage and (2) formulate securitization in a unified way as a bank's profit-maximizing behavior to control their asset size. More specifically, we estimate bank's unobservable firm value, compute leverage before and after securitization, and develop a measure by which one could see whether sales proceeds have reduced bank's debt. If a bank does not improve its leverage ratio, it may have preempted future cash flows and intended to pay out dividend. We solve an optimal control problem for timing of dividend payout where, taking advantage of limited liability, the shareholder maximizes the sum of dividend from the bank's asset securitization until possible insolvency time. Our model fully incorporates bank's leverage ratio and helps us to understand bank's behavior in various economic environments. Therefore, our framework can offer a comprehensive view of bank's securitization program, giving insights into why banks securitize their assets.
Keywords: Asset securitization program, leverage, singular stochastic control, bubble and crisis
JEL Classification: D81, G21, G32
Suggested Citation: Suggested Citation
By Yakov Amihud
By Yakov Amihud