The Role of Bank Credit Enhancements in Securitization

Benjamin H. Mandel, Donald Morgan and Chenyang Wei

No 20120718, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: As Nicola Cetorelli observes in his introductory post, securitization is a key element of the evolution from banking to shadow banking. Recognizing that raises the central question in this series: Does the rise of securitization (and shadow banking) signal the decline of traditional banking? Not necessarily, because banks can play a variety of background (or foreground) roles in the securitization process. In our published contribution to the series, we look at the role of banks in providing credit enhancements. Credit enhancements are protection in the form of financial support against losses on securitized assets in adverse circumstances. They’re the “magic elixir” that enables bankers to convert pools of possibly high-risk loans or mortgages into highly rated securities. This post highlights some findings from our article. One key finding: Banks are not being eclipsed by insurance companies (which are part of the shadow banking system) in the provision of credit enhancements.

Keywords: shadow banking; Credit enhancements; securitization (search for similar items in EconPapers)
JEL-codes: G1 G2 (search for similar items in EconPapers)
Date: 2012-07-18
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Citations: View citations in EconPapers (5)

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Journal Article: The Role of bank credit enhancements in securitization (2012)
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