Securitization is Not that Evil after All

60 Pages Posted: 22 Mar 2011

See all articles by Carmelo Salleo

Carmelo Salleo

affiliation not provided to SSRN

Ugo Albertazzi

ECB -DG Monetary Policy

Ginette Eramo

Bank of Italy

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Date Written: March, 15 2011

Abstract

A growing number of studies on the US subprime market indicate that, due to asymmetric information, credit risk transfer activities have perverse effects on banks’ lending standards. We investigate the larger part of the market for securitized assets (“prime mortgages”). Information on over a million mortgages written in Italy, a country with a regulatory framework analogous to the one prevalent in Europe, includes loan-level variables, characteristics of the originating bank and, most importantly, contractual features of the securitization deal, including the seniority structure of the ABSs issued by the Special Purpose Vehicle and the amount retained by the originator. We borrow a robust way to test for the effects of asymmetric information from the empirical contract theory literature (Chiappori and Salanié, 2000). Overall, our evidence suggests that banks can effectively counter the negative effects of asymmetric information in the securitization market by selling less opaque loans, using signaling devices (i.e. retaining a share of the equity tranche of the ABSs issued by the SPV) and building up a reputation for not undermining their own lending standards. the bottom-line is that securitization need not be accompanied by lower lending standards, and that securitized loans can actually be a pretty safe investment class.

Keywords: securitization, banking, asymmetric information, signaling, reputation

JEL Classification: D82, G21

Suggested Citation

Salleo, Carmelo and Albertazzi, Ugo and Eramo, Ginette and Gambacorta, Leonardo, Securitization is Not that Evil after All (March, 15 2011). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1787174 or http://dx.doi.org/10.2139/ssrn.1787174

Carmelo Salleo (Contact Author)

affiliation not provided to SSRN

Ugo Albertazzi

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ginette Eramo

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Leonardo Gambacorta

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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