Bankruptcy Remoteness and Incentive-Compatible Securitization

Quaderni - Working Paper DSE N° 928

27 Pages Posted: 28 Feb 2014

See all articles by Gabriella Chiesa

Gabriella Chiesa

University of Bologna - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 27, 2014

Abstract

Securitization performs two functions. One refers to the risk allocation between the bank and outside investors; the other consists of creating transferable/liquid securities. A key ingredient of liquid/claimtransferability is bankruptcy remoteness - the insolvency of the sponsor (the loan originator) has no impact on the securities. We explore the implications of bankruptcy remoteness on risk allocation and regulatory/policy issues. Under traditional banking, when debt/deposits coexist with securitization, bankruptcy remoteness amounts to: i) a seniority structure when debt/deposits (the claim that insist on the bank as a whole) have the lowest priority; ii) the bank finds it optimal to grant securities maximum protection - securitization without risk transfer. This constrains incentive-compatible lending below the social optimum, whenever at an optimal allocation not all risk bears on the bank. Policies that implement the social optimum are derived.

Keywords: Securitization, Bankruptcy remoteness, Risk transfer

JEL Classification: G21, G28, K22, D86

Suggested Citation

Chiesa, Gabriella, Bankruptcy Remoteness and Incentive-Compatible Securitization (February 27, 2014). Quaderni - Working Paper DSE N° 928, Available at SSRN: https://ssrn.com/abstract=2402144 or http://dx.doi.org/10.2139/ssrn.2402144

Gabriella Chiesa (Contact Author)

University of Bologna - Department of Economics ( email )

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