Securitized banking, asymmetric information, and financial crisis: regulating systemic risk away

Bhattacharya, Sudipto, Chabakauri, Georgy ORCID: 0009-0002-7980-269X and Nyborg, Kjell (2012) Securitized banking, asymmetric information, and financial crisis: regulating systemic risk away. Financial Markets Group Discussion Papers (704). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We develop a model of securitized (Originate, then Distribute) lending, in which both publicly observed aggregate shocks to values of securitized loan portfolios, and later some asymmetrically observed discernment of varying qualities of subsets thereof, play crucial roles. We find that originators and potential buyers of such assets may differ in their preferences over their timing of trades, leading to a reduction in the aggregate surplus accruing from securitization. In addition, heterogeneity in sellers' selected timing of trades - arising from differences in their ex ante beliefs - coupled with initial leverage choices based on pre-shock prices, may lead to financial crises, implying uncoordinated asset liquidations inconsistent with any inter-temporal market equilibrium. We consider and contrast two mitigating regulatory interventions: leverage restrictions, and ex ante specified resale price guarantees on securitized asset portfolios. We show that the latter tool performs strictly better than the former, by ensuring not only bank survival, but also enhanced social surplus arising from securitized lending. It does so by inducing a more coordinated market equilibrium, that does not lead to interim leverage buildup to support a "cherry picking" seller trading strategy.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2012 The Authors
Divisions:	Financial Markets Group Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
Date Deposited:	19 May 2023 09:06
Last Modified:	11 Dec 2024 19:46
URI:	http://eprints.lse.ac.uk/id/eprint/119049

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