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Pooling, tranching, and credit expansion

Bougheas, Spiros

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Abstract

Traditionally banks have used securitization for expanding credit and thus their profitability. It has been well documented that, at least before the 2008 crisis, many banks were keeping a high proportion of the securities that they created on their own balance-sheets. Those securities retained included both the high-risk ‘equity’ tranche and the low-risk AAA-rated tranche. This paper builds a simple model of securitization that accounts for the above retention strategies. Banks in the model retained the equity tranche as skin in the game in order to mitigate moral hazard concerns while they post the low-risk tranche as collateral in order to take advantage of the yield curve. When variations in loan quality are introduced the predicted retention strategies match well those found in empirical studies.

Citation

Bougheas, S. (2014). Pooling, tranching, and credit expansion. Oxford Economic Papers, 66(2), https://doi.org/10.1093/oep/gpt029

Journal Article Type Article
Acceptance Date Jun 1, 2013
Online Publication Date Aug 29, 2013
Publication Date Apr 1, 2014
Deposit Date Aug 31, 2016
Publicly Available Date Aug 31, 2016
Journal Oxford Economic Papers
Print ISSN 0030-7653
Electronic ISSN 0030-7653
Publisher Oxford University Press
Peer Reviewed Peer Reviewed
Volume 66
Issue 2
DOI https://doi.org/10.1093/oep/gpt029
Public URL http://eprints.nottingham.ac.uk/id/eprint/36132
Publisher URL http://oep.oxfordjournals.org/content/66/2/557.full
Copyright Statement Copyright information regarding this work can be found at the following address: http://eprints.nottingh.../end_user_agreement.pdf

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://eprints.nottingham.ac.uk/end_user_agreement.pdf





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