Pooling, tranching, and credit expansion
Traditionally banks have used securitization for expanding credit and thus their profitability. It has been well documented that, at least before the 2008 crisis, many banks were keeping a high proportion of the securities that they created on their own balance-sheets. Those securities retained incl...
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| Format: | Article |
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Oxford University Press
2014
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| Online Access: | https://eprints.nottingham.ac.uk/36132/ |
| _version_ | 1848795229793026048 |
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| author | Bougheas, Spiros |
| author_facet | Bougheas, Spiros |
| author_sort | Bougheas, Spiros |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | Traditionally banks have used securitization for expanding credit and thus their profitability. It has been well documented that, at least before the 2008 crisis, many banks were keeping a high proportion of the securities that they created on their own balance-sheets. Those securities retained included both the high-risk ‘equity’ tranche and the low-risk AAA-rated tranche. This paper builds a simple model of securitization that accounts for the above retention strategies. Banks in the model retained the equity tranche as skin in the game in order to mitigate moral hazard concerns while they post the low-risk tranche as collateral in order to take advantage of the yield curve. When variations in loan quality are introduced the predicted retention strategies match well those found in empirical studies. |
| first_indexed | 2025-11-14T19:28:46Z |
| format | Article |
| id | nottingham-36132 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T19:28:46Z |
| publishDate | 2014 |
| publisher | Oxford University Press |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-361322020-05-04T16:43:38Z https://eprints.nottingham.ac.uk/36132/ Pooling, tranching, and credit expansion Bougheas, Spiros Traditionally banks have used securitization for expanding credit and thus their profitability. It has been well documented that, at least before the 2008 crisis, many banks were keeping a high proportion of the securities that they created on their own balance-sheets. Those securities retained included both the high-risk ‘equity’ tranche and the low-risk AAA-rated tranche. This paper builds a simple model of securitization that accounts for the above retention strategies. Banks in the model retained the equity tranche as skin in the game in order to mitigate moral hazard concerns while they post the low-risk tranche as collateral in order to take advantage of the yield curve. When variations in loan quality are introduced the predicted retention strategies match well those found in empirical studies. Oxford University Press 2014-04-01 Article PeerReviewed Bougheas, Spiros (2014) Pooling, tranching, and credit expansion. Oxford Economic Papers, 66 (2). pp. 557-579. ISSN 0030-7653 http://oep.oxfordjournals.org/content/66/2/557.full doi:10.1093/oep/gpt029 doi:10.1093/oep/gpt029 |
| spellingShingle | Bougheas, Spiros Pooling, tranching, and credit expansion |
| title | Pooling, tranching, and credit expansion |
| title_full | Pooling, tranching, and credit expansion |
| title_fullStr | Pooling, tranching, and credit expansion |
| title_full_unstemmed | Pooling, tranching, and credit expansion |
| title_short | Pooling, tranching, and credit expansion |
| title_sort | pooling, tranching, and credit expansion |
| url | https://eprints.nottingham.ac.uk/36132/ https://eprints.nottingham.ac.uk/36132/ https://eprints.nottingham.ac.uk/36132/ |