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Rethinking the regulatory treatment of securitization


Rochet, Jean-Charles; Cerasi, Vittoria (2014). Rethinking the regulatory treatment of securitization. Journal of Financial Stability, 10:20-31.

Abstract

In a model where banks play an active role in monitoring borrowers, we analyze the impact of securitization on bankers’ incentives across different macroeconomic scenarios. We show that securitization can be part of the optimal financing scheme for banks, provided banks retain an equity tranche in the sold loans to maintain proper incentives. In economic downturns however securitization should be restricted. The implementation of the optimal solvency scheme is achieved by setting appropriate capital charges through a form of capital insurance, protecting the value of bank capital in downturns, while providing additional liquidity in upturns.

Abstract

In a model where banks play an active role in monitoring borrowers, we analyze the impact of securitization on bankers’ incentives across different macroeconomic scenarios. We show that securitization can be part of the optimal financing scheme for banks, provided banks retain an equity tranche in the sold loans to maintain proper incentives. In economic downturns however securitization should be restricted. The implementation of the optimal solvency scheme is achieved by setting appropriate capital charges through a form of capital insurance, protecting the value of bank capital in downturns, while providing additional liquidity in upturns.

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6 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 February 2014
Deposited On:20 Feb 2015 09:36
Last Modified:25 May 2016 06:16
Publisher:Elsevier Inc.
ISSN:1572-3089
Publisher DOI:https://doi.org/10.1016/j.jfs.2012.10.002
Official URL:http://www.sciencedirect.com/science/article/pii/S1572308912000629
Other Identification Number:merlin-id:7952

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