Nonrecourse Financing and Securitization

Mami Kobayashi

Ritsumeikan University; Ritsumeikan University

Hiroshi Osano

Kyoto University - Institute of Economic Research

April 2, 2012

Journal of Financial Intermediation 21 (2012) 659-693

We consider the role of the nonrecourse financing of securitization by a financial institution (FI). Our model suggests that even though the FI has the opportunity to provide liquidity support afterward, it is optimal for the FI to use the nonrecourse financing of securitization initially, because the nonrecourse security makes liquidation of the original asset more attractive for an FI that knows that the original asset is bad. However, our model also predicts that the nonrecourse financing of securitization, together with short-term maturity financing, forces the financial system to perform inefficiently in handling troubled loans and causes problems with inefficient liquidity support and overinvestment under certain conditions, despite the nonrecourse property of securitization. The theoretical results provide empirical implications for recent problems with securitized and structured finance in the United States and Europe.

Number of Pages in PDF File: 58

Keywords: asset-backed securities, financial distress, liquidity, maturity mismatch, structured finance

JEL Classification: D82, D86, G21, G23, G24, G33

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Date posted: April 4, 2012 ; Last revised: August 31, 2012

Suggested Citation

Kobayashi, Mami and Osano, Hiroshi, Nonrecourse Financing and Securitization (April 2, 2012). Journal of Financial Intermediation 21 (2012) 659-693. Available at SSRN: https://ssrn.com/abstract=2033645 or http://dx.doi.org/10.2139/ssrn.2033645

Contact Information

Mami Kobayashi
Ritsumeikan University ( email )
Ritsumeikan University ( email )
2-150 Iwakura-cho
Ibaraki, Osaka 5678570
Hiroshi Osano (Contact Author)
Kyoto University - Institute of Economic Research ( email )
Kyoto 606-8501
+81-75-753-7131 (Phone)
+81-75-753-7138 (Fax)
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