Optimal Form of Retention for Securitized Loans under Moral Hazard

Georges Dionne () and Sara Malekan
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Sara Malekan: Department of Management, Science and Technology, Amirkabir University of Technology, 424 Hafez Ave, Tehran 15875-4413, Iran

Risks, 2017, vol. 5, issue 4, 1-13

Abstract: We address the moral hazard problem of securitization using a principal-agent model where the investor is the principal and the lender is the agent. Our model considers structured asset-backed securitization with a credit enhancement (tranching) procedure. We assume that the originator can affect the default probability and the conditional loss distribution. We show that the optimal form of retention must be proportional to the pool default loss even in the absence of systemic risk when the originator can affect the conditional loss given default rate, yet the current regulations propose a constant retention rate.

Keywords: securitization; optimal retention; moral hazard; tranching; credit enhancement; conditional loss distribution (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Optimal form of retention for securitized loans under moral hazard (2015)
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