Securitization and Credit Risk: Evidence from Retained Interest in Securitized Mortgages

Scholz, Michael

Scholz_(2013)_-_Securitization_and_Credit_Risk_Evidence_from_Retained_Interest_in_Securitized_Mortgages.pdf - Published

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URN: urn:nbn:de:bsz:180-madoc-355822
Document Type: Working paper
Year of publication: 2013
Place of publication: Mannheim
Publication language: English
Institution: Business School > ABWL, Unternehmensrechnung u. Empirische Kapitalmarktforschung (Daske 2007-)
Subject: 330 Economics
Abstract: This paper analyzes bank- and loan-specific characteristics that determine the amount of retained interest held by US banks in mortgage securitizations. Economic theory suggests that retaining an interest in securitization transactions should help to mitigate information asymmetry problems between the parties involved. Consistent with investor demand for a signal of (credit) quality of the securitized assets, I find that credit risk of the transferred mortgages is positively associated with the amount of retained interest held. The demand for such a signal seems to be lower for banks with an established reputation for securitization transactions. Consistent with the view of securitization as a sophisticated tool to manage risk from loan origination, more sophisticated banks seem to hold more retained interest. It also appears that retained interest is negatively associated with credit risk exposure from other assets. These findings suggest that retained interest in securitization transactions serves as a mechanism to mitigate information asymmetry problems as well as a means to manage a bank’s risk profile.

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