Optimal Form of Retention for Securitized Loans Under Moral Hazard
Risks, https://www.mdpi.com/2227-9091/5/4/55/pdf
28 Pages Posted: 29 Nov 2015 Last revised: 5 Jan 2023
Date Written: November 27, 2015
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 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 distribution of portfolio losses, yet the current regulations propose a constant retention rate.
Keywords: Securitization, optimal retention, moral hazard, principal-agent model, tranching, credit enhancement, conditional loss distribution.
JEL Classification: D80, G01, G18, G21, G28.
Suggested Citation: Suggested Citation