Risk Retention in Securitization and Empty Creditors

46 Pages Posted: 13 Apr 2021 Last revised: 20 Sep 2022

See all articles by Evgenia Chouliara

Evgenia Chouliara

European Central Bank (ECB)

Edoardo D. Martino

University of Amsterdam - Amsterdam Center for Law & Economics (ACLE); European Banking Institute

Date Written: April 12, 2021


The risk retention rule was introduced in the US and the EU as a mechanism to curb the originate-to-distribute model, associated with securitizations and the financial crisis of 2008. This paper argues that besides its original financial stability rationale, the rule has positive spillovers on debt governance and specifically on the incentives to monitor, the design of covenants and the lender’s stance during renegotiation and bankruptcy (the ‘empty creditor’ problem). Risk retention in true sale securitizations makes the strongest case for debt governance, although the existence of various options of retention appears to be associated with varying incentives. The mechanism and effects of risk retention on synthetic securitizations remain ambivalent, given the perverse incentives associated with over-insurance (negative economic ownership). However, the upcoming restriction of double hedging for synthetic STS transactions is a positive development.

Keywords: Law & Finance, Financial Regulation, Debt Governance, Securitization, Risk Retention

JEL Classification: G21, G38, K22

Suggested Citation

Chouliara, Evgenia and Martino, Edoardo D., Risk Retention in Securitization and Empty Creditors (April 12, 2021). European Banking Institute Working Paper Series 2021 - no. 91, Amsterdam Law School Research Paper No. 2021-21, Amsterdam Center for Law & Economics Working Paper No. 2021-07, Available at SSRN: https://ssrn.com/abstract=3824733 or http://dx.doi.org/10.2139/ssrn.3824733

Evgenia Chouliara (Contact Author)

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314

Edoardo D. Martino

University of Amsterdam - Amsterdam Center for Law & Economics (ACLE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB

European Banking Institute ( email )


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