Pooling, Tranching and Credit Expansion

26 Pages Posted: 3 Jul 2012

See all articles by Spiros Bougheas

Spiros Bougheas

University of Nottingham - School of Economics

Date Written: June 29, 2012


Traditionally banks have used securitization for expanding credit and thus their profitability. It has been well documented that, at least before the 2008 crisis, many banks were keeping a high proportion of the securities that they created on their own balance-sheets. Those securities retained included both the high-risk ‘equity’ tranche and the low-risk AAA-rated tranche. This paper builds a simple model of securitization that accounts for the above retention strategies. Banks in the model retained the equity tranche as skin in the game in order to mitigate moral hazard concerns while they post the low-risk tranche as collateral in order to take advantage of the yield curve. When variations in loan quality are introduced the predicted retention strategies match well those found in empirical studies.

Keywords: securitization, tranching, credit expansion

JEL Classification: G210, G240

Suggested Citation

Bougheas, Spiros, Pooling, Tranching and Credit Expansion (June 29, 2012). CESifo Working Paper Series No. 3859, Available at SSRN: https://ssrn.com/abstract=2098790 or http://dx.doi.org/10.2139/ssrn.2098790

Spiros Bougheas (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

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