Incentives to Issue Low-Quality Securitized Products in the OTD Business Model

Masazumi Hattori and Kazuhiko Ohashi
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Masazumi Hattori: Institute for Monetary and Economic Studies, Bank of Japan (E-mail: masazumi.hattori@boj.or.jp)
Kazuhiko Ohashi: Professor, Hitotsubashi University (E-mail: kohashi@ics.hit-u.ac.jp)

No 09-E-26, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We consider an economy in which a lender finances loans to borrowers by issuing a securitized product to investors and in which the credit quality of the product can depend on whether the lender screens borrowers. In the presence of asymmetric information between the lender and investors regarding the credit quality of potential borrowers, overvaluation from the lender's perspective can occur for low-quality securitized products, which inefficiently induces the lender not to screen borrowers and hence to issue the securitized products of low credit quality. This is likely to occur when the probability of being in a bad state (i.e., the presence of low-quality borrowers) is low, or when the seeds of recession begin emerging in a booming economy.

Keywords: Originate-to-distribute; Securitization; Asymmetric information; Screening; Verification (search for similar items in EconPapers)
JEL-codes: G14 G21 G24 (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-cta
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