Skin-in-the-Game in ABS Transactions: A Critical Review of Policy Options
31 Pages Posted: 14 Feb 2017 Last revised: 5 Feb 2018
Date Written: December 7, 2017
In response to the financial crisis, as a way to align incentives of originators and investors, new regulation in the US (Dodd-Frank) and the EU (CRR) requires issuers of asset backed securities to hold some skin-in-the-game, offering a set of options for risk retention. We propose an intuitive metric exposing effective risk retention and demonstrate that it varies widely across the available retention options. Requiring open disclosure of the metric, rather than demanding choice among arbitrarily specified and dissimilar retention options, would allow markets to price retention properly, and issuers to choose their desired retention level freely.
Keywords: Structured finance, ABS, STS (simple, transparent, and standardized securitizations), regulation, retention, Dodd-Frank Act
JEL Classification: G28
Suggested Citation: Suggested Citation