Skin-in-the-Game in ABS Transactions: A Critical Review of Policy Options

Abstract

Relying on a hand-collected data set of European asset securitizations, we analyze risk
retention, a key regulatory reform requirement after the global financial crisis. We find today’s
ABS markets to be characterized by significant retention opacity, caused by differences
in legal retention options and retained portions. To improve the transparency of effective,
rather than nominal, risk retention in the market, we propose a new, simple metric that
captures the share of expected loss retained by the issuer. As to policy conclusions, we
suggest to change the existing regulation by dropping the mandatory minimum retention
and replacing it with a requirement for full transparency about effective risk retention.

Keywords: Structured finance, ABS, STS (simple, transparent, and standardized securitizations), regulation, retention, Dodd-Frank Act

JEL Classification: G28