Securitization under Asymmetric Information over the Business Cycle

Martin Kuncl

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: This paper studies the effciency of financial intermediation through securitization with asymmetric information about the quality of securitized loans. In this theoretical model, I show that, in general, by providing reputation-based implicit recourse, the issuer of a loan can credibly signal its quality. However, in boom stages of the business cycle, information on loan quality remains private, and lower quality loans accumulate on balance sheets. This deepens a subsequent downturn. The longer the duration of a boom, the deeper will be the fall of output in a subsequent recession. In recessions, the model also produces amplification of adverse selection problems on re-sale markets for securitized loans. These are especially severe after a prolonged boom period and when securitized loans of high quality are no longer traded. Finally, the model suggests that excessive regulation that requires higher explicit risk-retention by the originators of loans can adversely affect both quantity and quality of investment in the economy.

Keywords: securitization; financial crisis; asymmetric information; reputation; implicit recourse; market shutdowns; macro-prudential policy (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 G20 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-ban, nep-cta, nep-dge, nep-mac and nep-ore
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Securitization under asymmetric information over the business cycle (2019)
Working Paper: Securitization under Asymmetric Information over the Business Cycle (2015)
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