Rethinking the Regulatory Treatment of Securitization

36 Pages Posted: 23 Jul 2008 Last revised: 8 Jun 2013

See all articles by Vittoria Cerasi

Vittoria Cerasi

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Jean-Charles Rochet

Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute (GFRI); University of Zurich - Swiss Banking Institute (ISB)

Date Written: July 1, 2008

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.

Keywords: solvency regulation, securitization, capital insurance, monitoring

JEL Classification: G21, G38

Suggested Citation

Cerasi, Vittoria and Rochet, Jean-Charles, Rethinking the Regulatory Treatment of Securitization (July 1, 2008). Paolo Baffi Centre Research Paper No. 2008-21, Available at SSRN: https://ssrn.com/abstract=1170982 or http://dx.doi.org/10.2139/ssrn.1170982

Vittoria Cerasi (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy
+39-02-64485821 (Phone)
+39-02-64485878 (Fax)

Jean-Charles Rochet

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

University of Zurich - Swiss Banking Institute (ISB) ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland

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