Securitization and optimal retention under moral hazard. (English) Zbl 1304.91222

Summary: Securitization improves liquidity in capital markets by allowing originators to remove issued loans from its balance sheet and use the proceeds for other purposes. Securitization is often suspected of being one of the main reasons for the recent financial crisis. One concern is that securitization leads to moral hazard in lender screening and monitoring. By selling loans to investors and removing them from their books, banks have a lesser incentive to carefully evaluate and monitor borrowers’ credit quality to ensure that they can repay their loans. One problem in the literature is that the analysis of securitization is very general and suffers from a lack of specific security design analysis under asymmetric information. We address the moral hazard problem using a principal-agent model where the investor is the principal and the lender is the agent. We show that the optimal contract must contain a retention clause in the presence of moral hazard. The optimal retention is affected by tranching and credit enhancement.


91G20 Derivative securities (option pricing, hedging, etc.)
91B69 Heterogeneous agent models
Full Text: DOI Link


[1] Berndt, A.; Gupta, A., Moral hazard and adverse selection in the originate-to-distribute model of bank credit, J. Monetary Econ., 56, 725-743, (2009)
[2] Bolton, P.; Dewatripont, M., Contract theory, 724, (2005), MIT Press Cambridge, MA
[3] Brunnermeier, M. K., Deciphering the liquidity and credit crunch 2007-08, J. Econ. Perspect., 23, 77-100, (2009)
[4] Casu, B.; Clare, A.; Sarkisyan, A.; Thomas, S., Does securitization reduce credit risk taking? empirical evidence from US bank holding companies, Eur. J. Finance, 17, 769-788, (2011)
[5] Coval, J.; Jurek, J.; Stafford, E., The economics of structured finance, J. Econ. Perspect., 23, 3-25, (2009)
[6] DeMarzo, P. M., The pooling and tranching of securities: a model of informed intermediation, Rev. Financ. Stud., 18, 1-35, (2005)
[7] DeMarzo, P. M.; Duffie, D., A liquidity-based model of security design, Econometrica, 67, 65-99, (1999) · Zbl 1049.91511
[8] Dionne, G., 2009. Structured finance, risk management, and the recent financial crisis. http://ssrn.com/abstract=1488767.
[9] Dionne, G., Harchaoui, T.M., 2003. Banks’ capital, securitization and credit risk: an empirical evidence for Canada. Working Paper 03-01, Canada Research Chair in Risk Management, HEC Montreal. http://ssrn.com/abstract=369501. Also published in Insurance and Risk Management 75 (4), 459-485, 2008.
[10] Donnelly, C.; Embrechts, P., The devil is in the tails: actuarial mathematics and the subprime mortgage crisis, Astin Bull., 40, 1-33, (2010) · Zbl 1230.91181
[11] European Parliament, Report on the proposal for a directive of the European parliament and of the council amending directives 2006/48/EC and 2006/49/EC, session document A6-0139/2009, (2009)
[12] Fender, I.; Mitchell, J., The future of securitisation: how to align incentives?, BIS Quart. Rev., 27-43, (2009)
[13] Fender, I., Mitchell, J., 2009b. Incentives and tranche retention in securitisation: a screening model (Centre for Economic Policy Research).
[14] Gorton, G. B.; Pennacchi, G. G., Banks and loan sales: marketing non-marketable assets, J. Monetary Econ., 35, 389-411, (1995)
[15] Unregulated financial markets and products. consultation report, (2009)
[16] Kendall, L. T.; Fishman, M. J., A primer on securitization, (2000), The MIT Press
[17] Keys, B. J.; Mukherjee, T.; Seru, A.; Vig, V., Did securitization lead to Lax screening? evidence from subprime loans, Quart. J. Econ., 125, 307-362, (2010)
[18] Keys, B.J., Mukherjee, T., Seru, A., Vig, V., 2011. 620 FICO, Take II: Securitization and screening in the subprime mortgage market. Mimeo.
[19] Mian, A.; Sufi, A., The consequences of mortgage credit expansion: evidence from the US mortgage default crisis, Quart. J. Econ., 124, 1449-1496, (2009) · Zbl 1177.62122
[20] Osano, H., Security design, insider monitoring, and financial market equilibrium, Eur. Finance Rev., 2, 273-302, (1999) · Zbl 0937.91069
[21] Parlour, C. A.; Plantin, G., Loan sales and relationship banking, J. Finance, 63, 1291-1314, (2008)
[22] Rajan, U., 2010. The failure of models that predict failure: distance, incentives and defaults. London Business School.
[23] Selody, J.; Woodman, E., Reform of securitization, Financ. Syst. Rev., 47-52, (2009)
[24] US Department of the Treasury, 2011. Monthly statement of the public debt of the United States: January 31, 2011.
[25] US Treasury, 2009. Financial regulatory reform: a new foundation, June 2009.
[26] Winter, R. A., Optimal insurance under moral hazard, (Dionne, G., Handbook of Insurance, (2013), Springer NY), 205-230
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.