Demand for safety, risky loans: A model of securitization

Anatoli Segura and Alonso Villacorta

No 14313, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We build a competitive equilibrium model of securitization in presence of demand for safety by debt investors. Securitization vehicles create safe assets by pooling idiosyncratic risks from loan originators. Equity is endogenously allocated to provide skin-in-the-game in originators and loss-absorption against aggregate risk in vehicles. Credit expansions driven by increases in safety demand lead to securitization booms and riskier loans. They also induce reallocations of equity towards junior tranches of securitized assets that may increase loan risk and reduce output relative to standard credit supply expansions. We find novel predictions on loan and equity risk premia consistent with empirical evidence.

Keywords: Securitization; Originate-to-distribute; Safety demand; Diversification; Moral hazard (search for similar items in EconPapers)
JEL-codes: G01 G20 G28 (search for similar items in EconPapers)
Date: 2020-01
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Working Paper: Demand for safety, risky loans: A model of securitization (2020)
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