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Confidence banking and strategic default

Guillermo Ordoñez

Journal of Monetary Economics, 2018, vol. 100, issue C, 101-113

Abstract: Securitization relies on confidence. As securities are tied to a particular asset (or pool of assets), and investors lose when the asset defaults, the security issuer usually provides further coverage by promising to use the proceedings from other, non-securitized, assets. Although these promises are difficult to enforce, the issuer may still have incentives to strategically avoid default in order to build a reputation of holding high-quality assets. Confidence makes securitization more dependent on the issuer’s reputation than other forms of financing and more volatile to forces behind reputation concerns, such as expectations about future profits.

Keywords: Reputation; Securitization; Strategic default; Confidence (search for similar items in EconPapers)
Date: 2018
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