Asset Securitization and Optimal Retention

Author/Editor:

John Kiff ; Michael Kisser

Publication Date:

March 1, 2010

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2010/074

Subject:

Credit Credit risk Financial sector stability Loans Stocks

English

Publication Date:

March 1, 2010

ISBN/ISSN:

9781451982176/1018-5941

Stock No:

WPIEA2010074

Pages:

37

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