Working Paper: CEPR ID: DP14313
Authors: Anatoli Segura; Alonso Villacorta
Abstract: We build a competitive equilibrium model of securitization in presence of demand for safety by debt investors. Securitization vehicles create safe assets by pooling idiosyncratic risks from loan originators. Equity is endogenously allocated to provide skin-in-the-game in originators and loss-absorption against aggregate risk in vehicles. Credit expansions driven by increases in safety demand lead to securitization booms and riskier loans. They also induce reallocations of equity towards junior tranches of securitized assets that may increase loan risk and reduce output relative to standard credit supply expansions. We find novel predictions on loan and equity risk premia consistent with empirical evidence.
Keywords: securitization; originate-to-distribute; safety demand; diversification; moral hazard
JEL Codes: G01; G20; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increases in safety demand (J28) | Securitization booms (G10) |
| Securitization booms (G10) | Riskier loans (G21) |
| Increases in safety demand (J28) | Riskier loans (G21) |
| Increases in safety demand (J28) | Deterioration in loan quality (G33) |
| Increases in safety demand (J28) | Reduced expected output (E23) |
| Credit expansions driven by safety demand (E51) | Riskier loans (G21) |