Working Paper: CEPR ID: DP12619
Authors: Jan Pieter Krahnen; Christian Wilde
Abstract: In response to the financial crisis, as a way to align incentives of originators and investors, new regulation in the US (Dodd-Frank) and the EU (CRR) requires issuers of asset backed securities to hold some skin-in-the-game, offering a set of options for risk retention. We propose an intuitive metric exposing effective risk retention and demonstrate that it varies widely across the available retention options. Requiring open disclosure of the metric, rather than demanding choice among arbitrarily specified and dissimilar retention options, would allow markets to price retention properly, and issuers to choose their desired retention level freely.
Keywords: structured finance; ABS; STS; simple; transparent and standardized securitizations; regulation; retention; Dodd-Frank Act
JEL Codes: G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory options (G18) | effective retention (M51) |
| risk retention regulations (G22) | alignment of interests (L21) |
| retention metric (RM) (C29) | effective risk retention (G22) |
| certain regulatory options (G18) | misalignment of incentives (D82) |