European Parliament Library

Asset Securitization and Optimal Retention, John Kiff, Michael Kisser

This paper builds on recent research by Fender and Mitchell (2009) who show that if financial institutions securitize loans, retaining an interest in the equity tranche does not always induce the securitizer to diligently screen borrowers ex ante. We first determine the conditions under which this scenario becomes binding and further illustrate the implications for capital requirements. We then propose an extension to the existing model and also solve for optimal retention size. This also allows us to capture feedback effects from capital requirements into the maximization problem. Preliminary results show that equity tranche retention continues to best incentivize loan screening
Table Of Contents
Cover Page; Title Page; Copyright Page; Contents; 1 Introduction; 2 Discussion of Fender and Mitchell (2009); 2.1 Summary of the Model; 2.1.1 Vertical slice retention; 2.1.2 Equity tranche retention; 2.1.3 Mezzanine tranche retention; 2.1.4 Optimal retention conditions; 2.2 Numerical Analysis; 2.2.1 High Quality Market; 2.2.2 Low Quality Market; 2.2.3 Impact on Capital Requirements; 2.2.4 Intermediate Summary; 3 Optimal Retention and Screening Policy; 3.1 Equity Retention; 3.1.1 Case E1: No exhaustion of equity tranche; 3.1.2 Case E2: Equity gets exhausted in low state of economy
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (55 p.)
Specific Material Designation
Form Of Item

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