Securitization is Not that Evil after All

60 Pages Posted: 7 Jun 2011  

Ugo Albertazzi

Bank of Italy

Ginette Eramo

Bank of Italy

Leonardo Gambacorta

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

Carmelo Salleo

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 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 a large part of the market for securitized assets ("prime mortgages") in Italy, a country with a regulatory framework analogous to the one prevalent in Europe. Information on over a million mortgages consists of 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.

Keywords: securitization, asymmetric information, signaling, reputation

JEL Classification: D82, G21

Suggested Citation

Albertazzi, Ugo and Eramo, Ginette and Gambacorta, Leonardo and Salleo, Carmelo, Securitization is Not that Evil after All (March 1, 2011). BIS Working Paper No. 341. Available at SSRN: https://ssrn.com/abstract=1859227

Ugo Albertazzi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+3906 4792 3625 (Phone)
+3906 4792 3723 (Fax)

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)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Carmelo Salleo

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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