Bhattacharya, Sudipto, Chabakauri, Georgy and Nyborg, Kjell G.
(2011)
Securitized lending, asymmetric information, and financial crisis.
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Department of Finance, London School of Economics and Political Science, London, UK.
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 asymmetrically observed discernment of the qualities of subsets thereof, play crucial roles, as in the recent paper of Bolton, Santos and Scheinkman (2010). Unlike in their framework, we find that originators and potential buyers of such assets may differ in their preferences over timing of trades, leading to a reduction in the aggregate surplus accruing from securitization. In addition, heterogeneity in agents’ selected timing of trades – arising from differences in their ex ante beliefs - coupled with high leverage, may lead to financial crises, implying uncoordinated asset liquidations inconsistent with overall (inter-temporal) market equilibrium. We consider and contrast mitigating regulatory policies, such as leverage restrictions and corresponding ex ante resale price guarantees on securitized asset portfolios. We show that the latter performs strictly better than the former, by ensuring not only bank survival, but also enhancing the social surplus arising from securitized lending, in a better coordinated equilibrium.
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