Portfolio Sales and Signaling

Abstract

A common practice of banks has been to pool assets of different qualities and then sell a fraction of the newly created portfolios to investors. We extend the signaling model for single sales of risky assets to portfolio sales. We identify conditions under which signaling at the portfolio level dominates signaling at the single asset level. In particular, when banks have better information about loan types on their books, and some commitment power to sales, can profit by pooling assets whilst retaining a skin in the game.

Keywords: securitization, skin in the game, signaling, tranching

JEL Classification: D820, G210, G230