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Incentives and tranche retention in securitisation: a screening model. NBB Working Paper 177, October 2009

Fender, Ingo and Mitchell, Janet. (2009) Incentives and tranche retention in securitisation: a screening model. NBB Working Paper 177, October 2009. [Working Paper]

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    Abstract

    This paper examines the power of different contractual mechanisms to influence an originator's choice of costly effort to screen borrowers when the originator plans to securitise its loans. The analysis focuses on three potential mechanisms: the originator holds a "vertical slice", or share of the portfolio; the originator holds the equity tranche of a structured finance transaction; the originator holds the mezzanine tranche, rather than the equity tranche. These mechanisms will result in differing levels of screening, and the differences arise from varying sensitivities to a systematic risk factor. Equity tranche retention is not always the most effective mechanism, and the equity tranche can be dominated by either a vertical slice or a mezzanine tranche if the probability of a downturn is likely and if the equity tranche is likely to be depleted in a downturn. If the choice of how much and what form to retain is left up to the originator, the retention mechanism may lead to low screening effort, suggesting a potential rationale for government intervention.

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    Item Type: Working Paper
    Uncontrolled Keywords: Securitisation, retention requirements, tranching, screening incentives.
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > Single Market > capital, goods, services, workers
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > National Bank of Belgium (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 29 Oct 2009
    Page Range: p. 50
    Last Modified: 15 Feb 2011 18:17
    URI: http://aei.pitt.edu/id/eprint/11877

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