Securitization and moral hazard: Does security price matter?

Luke Liu

MPRA Paper from University Library of Munich, Germany

Abstract: This article analyses the effect of security price on the behaviour of bank securitization. We present a model of bank securitization in which security price together with liquid constraints create the incentive for banks to originate and sell assets backed securities to investors. Banks have a comparative advantage in locating and screening projects within their locality. Our results show that under the buyer’s market pricing mechanism the banks with different liquidity constraints can share the risk and the moral hazard problem is not serious; but under the seller’s market pricing mechanism the banks have the incentive to conduct strategic securitization and the moral hazard problem is serious. Our main idea has been supported by the subprime crisis broke in the US in 2007.

Keywords: Securitization; Security price; Moral hazard (search for similar items in EconPapers)
JEL-codes: C02 C50 G21 (search for similar items in EconPapers)
Date: 2011-05-19
New Economics Papers: this item is included in nep-ban and nep-cta
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https://mpra.ub.uni-muenchen.de/35004/1/MPRA_paper_35004.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/38016/1/MPRA_paper_38016.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:35004

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