Bhattacharya, Sudipto, Chabakauri, Georgy and Nyborg, Kjell G.
Securitized lending, asymmetric information, and financial crisis.
Department of Finance, London School of Economics and Political Science, London, UK.
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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