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Understanding the role of bank lending in corporate innovation is important to policymakers, practitioners, and academics. We provide new evidence on such a role by exploiting the implementation of SFAS 166/167, which removed the off--balance sheet status of certain securitized assets of banks. The regulation affects bank lending and thus represents a credit supply shock to borrowing firms. We find that affected banks raise spreads and cut loan amounts after the regulation. Firms that borrow from affected banks reduce R\&D investment and the number and quality of the patents they generate. The reduction is concentrated among firms whose banks experience more downward pressure on capital ratios and greater market discipline, and firms that are more dependent on external financing. Additional analyses reveal that information asymmetry between incumbent banks and outsiders with respect to borrowing firms prevent them from switching. The overall findings suggest that bank lending promotes borrowing firms' innovation activities. Policies that restrict bank lending are likely to hurt innovation of borrowers.

We study the effect of securitization on servicers' asset liquidation decisions. Conditional on liquidation, we find houses financed by loans in private label securities were more likely to be liquidated via real estate owned (REO) transactions than houses financed by portfolio loans. We exploit this fundamental relationship in an instrumental variables specification to show each house liquidated via an REO instead of a short sale resulted in an additional 0.19 homeowner defaults within a 0.10-mile radius. Our findings provide new evidence of principal-agent conflicts introduced by securitization while highlighting their second-order effects on nearby default behavior and the real economy.

The 2008 financial crisis exposed a longstanding problem in financial regulation: traditional regulatory strategies tend to be procyclical. That is, regulatory tools—most notably, bank capital requirements—incentivize excessive credit growth during economic expansions and insufficient lending during contractions. The procyclicality of U.S. financial regulation was a key driver of the housing bubble in the mid-2000s and the massive credit crunch that followed. To combat this phenomenon, Congress and the federal banking agencies attempted to mitigate procyclical boom-and-bust cycles by implementing regulatory approaches that were explicitly countercyclical. The Dodd-Frank Act and related post-crisis reforms included several countercyclical features that were designed to become stricter during periods of economic growth and more lenient during contractions, with the goal of smoothing economic cycles. Less than a decade later, however, these countercyclical tools failed to prevent unprecedented financial stress during the COVID-19 recession. This Article is the first legal scholarship to revisit the design of countercyclical rules in light of the COVID-19 pandemic. It reveals weaknesses in Dodd-Frank’s countercyclical approach and the significant costs of failing to implement an effective countercyclical strategy. The Article also establishes a blueprint for strengthening the United States’ countercyclical framework going forward. The Article identifies three principles—automaticity, portfolio strategy, and market-wide coverage—that should guide countercyclical policymaking. It then applies these principles to five specific areas in which financial regulators should bolster countercyclical oversight: bank capital requirements, accounting standards, securitization rules, early remediation guidelines, and margin requirements. Taken together, these reforms are critical to making countercyclical financial regulation work and creating a more stable and prosperous financial system.

This paper asks: why did innovation in securitized mortgages spike before the 2007-09 crisis? We propose that this innovation was driven by increased competition among sponsors who securitized and sold mortgages i.e., these sponsors demanded more innovative mortgages from originators who complied. We use a regulatory change in 2000 that generated plausibly exogenous variation in local sponsor competition, to empirically identify the effect of sponsor competition on loan innovation. By comparing cohorts of loans securitized during the same time, we show that sponsor-induced innovation led to riskier mortgages being packaged into Prime deals during the pre-crisis boom period. This evidence of riskier collateral backing lower-yielding MBS is consistent with the obfuscation motives of sponsors.

We study a dynamic moral hazard problem in which a bank originates a pool of loans that it sells to competitive investors via securitization. The bank controls the default risk of the loans by screening at origination and monitoring after origination, but it is subject to moral hazard. The optimal contract between the bank and investors can be implemented via a time-decreasing stake within the loan pool, so the bank's monitoring incentives decrease and default risk increases over time. We find that screening and monitoring have positive incentive synergies and are complements. Credit ratings distort incentives, potentially increasing credit risk, and are particularly beneficial for high quality and short-maturity loans.

How do technological advancements in credit markets affect minority communities? We use the endorsement of FICO credit scores by the Government Sponsored Enterprises (GSEs) in mortgage underwriting to answer this question. The use of credit scores led to the sorting of prime and subprime lenders across minority and non-minority neighborhoods. In minority neighborhoods prime lenders were substituted by subprime lenders and, as a result, the share of subprime lending in minority neighborhoods increased by 5 percentage points. Prime lenders with a stronger relationship with the GSEs reduced their lending in minority neighborhoods more. The level of securitization by the GSEs in minority neighborhoods also decreased.

While the COVID-19 pandemic has shattered the world with severe human toll and catastrophic economic losses and sufferings, it has also heightened the need for more effective solutions for managing epidemic-related risks. In this paper, we pro- pose two capital market-based epidemic financing facilities to address two extremes of epidemic risks. The proposed pandemic bond is meant to hedge the severe pandemic outbreak while the proposed endemic swap can be used to hedge a recurrent endemic. Using coronavirus as an example of a pandemic and dengue fever as an example of an endemic, we discuss the modeling and pricing of the proposed epidemic securities. We price the proposed securities based on epidemiological models as well as actuarial models. We show that the proposed hedging securities can provide additional capital relief for pandemic recovery plans, effectively stablize hedgers’ cash flows, and create attractive returns to different investors.

Using credit register data for loans to Italian firms we test for the presence of asymmetric information in the securitization market by looking at the correlation between the securitization (risk-transfer) and the default (accident) probability. We can disentangle the adverse selection from the moral hazard component for the many firms with multiple bank relationships. We find that adverse selection is widespread but that moral hazard is confined to weak relationships, indicating that a strong relationship is a credible enough commitment to monitor after securitization. Importantly, the selection of which loans to securitize based on observables is such that it largely offsets the (negative) effects of asymmetric information, rendering the overall unconditional quality of securitized loans significantly better than that of non-securitized ones. Thus, despite the presence of asymmetric information, our results do not accord with the view that credit-risk transfer leads to lax credit standards.

Agency MBS issuers can choose among three securitization venues: individual securitization where an issuer uses her own loans to create an MBS, collective securitization where different issuers deliver loans into a common MBS, and cash window where issuers receive immediate cash payment by selling loans to Fannie Mae or Freddie Mac, who then conduct securitization. We find that issuers with greater immediate liquidity needs (e.g., smaller issuers and shadow banks) have a larger fraction of their loans securitized through cash window. The uniform pricing feature of collective securitization results in cross-subsidy from traditional banks, who have relatively high-value loans, to shadow banks, especially fintech issuers, who have relatively low-value loans; hence, shadow banks and traditional banks prefer collective and individual securitization, respectively. We further show that securitization venues affect the quality and quantity of loans that issuers securitize, using Fannie Mae's policy shock on collective securitization and the COVID-19 shock on cash window.

The risk retention rule was introduced in the US and the EU as a mechanism to curb the originate-to-distribute model, associated with securitizations and the financial crisis of 2008. This paper argues that besides its original financial stability rationale, the rule has positive spillovers on debt governance and specifically on the incentives to monitor, the design of covenants and the lender’s stance during renegotiation and bankruptcy (the ‘empty creditor’ problem). Risk retention in true sale securitizations makes the strongest case for debt governance, although the existence of various options of retention appears to be associated with varying incentives. The mechanism and effects of risk retention on synthetic securitizations remain ambivalent, given the perverse incentives associated with over-insurance (negative economic ownership). However, the upcoming restriction of double hedging for synthetic STS transactions is a positive development.

How might a modern settlement system with distributed ledger technology achieve zero settlement risk? We consider the design of a settlement system based that satisfies two integral features: information-leakage proof and zero settlement risk. The legacy settlement systems partition market participants’ private information but are vulnerable to settlement risk. We show that a token system can be designed to achieve both as long it employs a protocol that enforces appropriate restrictions on the set of programs traders can enter. First, programs must be immediately executed, i.e. a collapse between trade and settlement; second, they must also involve transactions based on verifiable claims, at the time of trade. We provide concrete applications of zero settlement risk system to derivatives, collateralized loans, and securitization.

Regulations for securitization have been subject to wide-spread criticism continuously. Before the global financial crisis, they were blamed for creating perverse incentives for banks and after the crisis, they are blamed for punitive treatment to the securitization market. Covered Bonds share many similarities with asset-backed securities, but they are provided favorable treatment in regulations. This discriminatory treatment has given rise to many concerns among the market participants. The present study reviews the post-crisis regulations and highlights that many of these regulations may not be justified or not be able to control the problems in the securitization market. This article introduces the concept of incremental regulations and links regulations with the scale of securitization activity followed by a bank. The article also addresses the concern about discriminatory treatment of securitization with respect to covered bonds in the European market. The article concludes that regulations should devise regulations that control the limitless securitization, but also help to restart this market.

We show that insurance companies have almost nonupled their investments in collateralized loan obligations (CLOs) in the post-crisis period, reaching total holdings of $125 billion in 2019. The growth in CLOs’ investments has far outpaced that of loans and corporate bonds, and was characterized by a strong preference for mezzanine tranches rated investment grade over triple-A rated tranches. We document that these phenomena reflect a search for yield behavior. Conditional on capital charges, insurance companies invest more heavily in bonds and CLO tranches with higher yields. Preferences for CLO tranches derived from tranches’ higher yields relative to bonds with the same rating, and increased following the 2010 capital regulatory reform, resulting in insurance companies holding more than 40 percent of mezzanine tranches outstanding in 2019. In the process, insurance companies created the demand for the risky tranches that are critical to the CLO issuance.

Previous studies found that through facilitating “bankruptcy remoteness,” asset-backed securitization can reduce firms’ borrowing costs and probabilities of facing credit constraints and increase their market values. However, little research has examined the real effect of securitization on firms’ product-market activities. We examine the real estate development industry and find that after securitization, developers become more aggressive in purchasing land and entering new markets. With extra funding from securitization, financially constrained developers become more likely to purchase a parcel independently, whereas developers with capacity constraints conduct more strategic alliances with other developers in purchasing a parcel to utilize more production capacities.

In the current EU legislative framework for investment funds - UCITS Directive and AIFMD - credit funds have rightly been singled out as something quite unique. In fact, they stand at the crossroads of capital markets’ and credit institutions’ regulations, playing a role of both an investor in a particular asset class, and of a credit facility provider. They may also effectively perform other functions, such as those of securitization vehicles, or comparable to Asset Management Companies (“AMCs”) for the management and processing of non-performing loans. They are, therefore, hybrid creatures, difficult to regulate and, sometimes, to understand. This is due not only to the absence of any specific product regulation in the context of the AIFMD, but also to the uncertainties surrounding the notion of “credit” and “credit granting” in EU law. Within the EU, legislation on credit funds developed, until now, in a haphazard manner. Absent a clear reference scheme, the result is unsatisfactory, and far from being able to integrate EU Markets in this respect. Further, more robust harmonization is therefore needed in this area, now more than ever in the context of the debate on the effects of the pandemic and the management of NPLs. The paper aims to provide sufficient evidence to support these assumptions, also taking into account the lively debate on the role of Asset Management Companies and the development of an efficient secondary market for loans in the EU.

Migration has taken place throughout human history and continues to do so in the 21st century. In many recent instances, the states to which migrants are headed have framed migration as a security issue, i.e. a threat to their citizens’ livelihood, safety, and cultural identity. Discourses that securitize migration, thus criminalizing immigrants, are not unique to the US and the EU, or to South-North migration: they pertain to South-South migration as well. This article draws attention to a case of migration and border securitization from the global South: the one concerning India-bound informal migration originating from Bangladesh. This, incidentally, is also the country of origin of large numbers of migrants that have made their way to Europe during the last decade. This article asks what the consequences of a securitized approach to the framing and managing of migration are, and whether they are worth the costs or are at all affordable for the countries involved. The article aims to assess the potential impact that securitized discourses have on Indo-Bangladeshi relations, and on the domestic politics of India and Bangladesh. To do so, it reviews the processes of securitiziation of the India-Bangladesh border and criminalization of Bangladeshi migrants in India’s contemporary domestic politics with reference to recent (2019-2021) events and current affairs.

Even before the coronavirus plunged the world's financial markets, analysts and regulators had been describing the $1.2 to 1.5 trillion leveraged loan market as a ticking time bomb likely to play a role in causing the next financial crisis. Many have been denouncing problematic fundamentals in the current leveraged loan market and comparing them to those that caused the 2007 subprime mortgage crisis to spread into a full-blown financial crisis towards the second half of 2008. Two legal innovations in the world of corporate finance are the main anticipated culprits of a future financial meltdown: covenant-lite (or “cov-lite”) loans and Collateralized Loan Obligations (CLOs). Our paper argues that concerns of a systemic breakdown in the financial system as a result of cov-lite loans and CLOs may be overstated. To do this, we first draw from a seminal working paper by researchers at the Federal Reserve of Philadelphia that demonstrate that cov-lite loans are almost universally part of a syndication structure that binds borrowers to compliance with financial covenants. Secondly, the paper succinctly explains CLOs and compares them with similar structured finance and securitization products, such as Collateralized Debt Obligations (CDOs), CDO-squared and CDO-cubed, as well as with derivatives, such as synthetic CDOs and Credit Default Swaps (CDSs), all of which played a role in obscuring financial market fundamentals in the lead-up to the great financial crisis. Third, the paper briefly analyzes the latest stress test results and financial stability reports by regulators in charge of monitoring systemic risk in the banking and wider financial systems. Finally, the paper explores EBITDA add-backs, a product of contract law and accounting that have played an increasing role in large Leveraged Buyout (LBO) deals and could distort a lender's credit monitoring functions, but concludes that they are currently ignored in the ratings analysis of leveraged loans and CLOs.

Based on European RMBS deals with 24 million quarterly loan observations, we examine the effect of risk retention on bank behavior. Using OLS, propensity score matching, and instrumental variable regressions, we examine why retention deals perform better. Analyzing monitoring effort and the workout process, we find that the probability of rating updates or collateral revaluations is higher, and the rating quality is better. Retention loans have a lower probability of becoming non-performing, a lower delinquency amount, and a shorter time in arrears. Moreover, non-performing and defaulted retention loans are more likely to recover. We observe that total losses are lower for deals with retention, which are driven by lower default rates, lower exposures at default, and higher recovery rates. Overall, our results suggest that retention reduces moral hazard and incentivizes banks to exert higher effort, which results in superior securitized asset performance.

This paper shows the importance of interest rate risk and prepayment risk in fixed-rate mortgages in influencing banks’ securitization of mortgages. Banks with longer-maturity liabilities are more capable of taking the interest rate risk and therefore securitize fewer mortgages. In contrast, banks with shorter-maturity liabilities securitize more mortgages and originate fewer jumbo mortgages, which can not be securitized through Fannie Mae and Freddie Mac. Moreover, household mortgage refinancing induces prepayment risk. The prepayment risk matters more for banks with longer-maturity liabilities, due to their high retention of mortgages on balance sheets. Ex ante, anticipating the prepayment risk, banks with longer-maturity liabilities securitize more mortgages. Ex post, banks with longer-maturity liabilities are less likely to help households refinance their existing mortgages.

The 2008 Global financial crisis and the subsequent European sovereign debt crisis deteriorated banks funding conditions and lead to a substitution effect among bond instruments. We examine the pricing of straight, covered and securitization bonds issued by European banks in the 2000-2016 period, with a particular focus on the effect of sovereign credit risk and ECB’s asset purchase programmes on spreads. We find that (i) straight, covered and securitization bonds are priced in segmented markets, (ii) the impact of common pricing determinants on spreads differ significantly between non-crisis and crisis periods, (iii) sovereign credit risk is an important determinant of banks’ cost of funding, especially in crisis periods, (iv) ECB’s asset purchase programmes exhibited mixed effectiveness in improving banks funding conditions, (v) contractual bond characteristics other than credit ratings, macroeconomic factors and bank characteristics are important determinants of spreads, and (vi) there is evidence of heterogeneity across countries.

Lenders’ access to soft information on appraisal inflation could lead to adverse selection in private mortgage securitization. Combining a nationwide mortgage data with a real estate transaction data and using a difference-in-differences empirical design, we document that securitized refinance loans have more than 3% higher appraisal inflation than portfolio loans at key LTV notches. At those notches, securitized mortgages are more likely to default by 19 to 50% in relative terms. The additional credit risk associated with the appraisal inflation on sold notch loans does not seem to be priced in the mortgage rate. The results are robust after controlling for servicer and lender effects, and hold when we infer appraisal inflation from repeat sale transactions or hedonic price estimates. These findings indicate the existence of adverse selection in private securitization where lenders sell mortgages with higher appraisal inflation to MBS investors and keep mortgages with lower appraisal bias in their own portfolios, without compensating investors for the additional credit risk.

We investigate the replenishment of 102 asset-backed securities (ABS) backed by more than 1.7 million small- and medium-sized enterprise loans. Based on our extensive data set from 2012 to 2017 obtained from the first and only loan-level central repository for ABS in Europe, we reveal that loans added to securitized loan portfolios after the transactions' closing perform worse than loans that are part of the initial portfolio. We additionally provide evidence that originators induce these performance differences since they exploit their information advantage by deliberately adding low-quality loans to securitized loan portfolios. This adverse behavior is mitigated by originators' reputation efforts, by increasing transparency in the ABS market, as for example per the European Central Bank's loan-level initiative, and most effectively by their interaction.

I separately estimate the effect of local credit booms driven by balance sheet lending and those driven by securitization during the 2002-2006 period on the severity of the 2007-2009 recession in the United States. I construct a novel dataset, linking publicly available data on residential mortgage originations from the Home Mortgage Disclosure Act together with bank financial statements and county level economic outcomes. I exploit geographic variation in bank origination activity across counties to construct county level measures of exposure to securitization and balance sheet lending activity during the 2002-2006 period that are orthogonal to local economic conditions. Results show that 2002-2006 securitization exposure is predictive of sharper declines in home prices, employment, and a rise in mortgage delinquencies during the subsequent crisis period. The same is not true for balance sheet lending, which does not affect crisis period home prices and generates a drop in employment that is con fined to the nontradable sector. Results suggest that this difference is driven by risk taking that is specific to securitized lending. Balance sheet booms generate an expansion in lending to higher quality borrowers, while securitization booms increase credit availability at the lower end of the credit distribution.

We study the design of measurement rules when banks engage in loan transfers in secondary credit markets. Our model incorporates two standard frictions: 1) banks' monitoring incentives decrease in loan transfers, and 2) banks have private information about loan quality. Under only the monitoring friction, we find that the optimal measurement rule sets the same measurement precision regardless of bank characteristics, and strikes a balance between disciplining banks' monitoring efforts vs. facilitating efficient risk sharing. However, under both frictions, uniform measurement rules are no longer optimal but induce excessive retention, thus inhibiting efficient risk sharing. We show that the optimal measurement rule should be contingent on the amount of loan transfers. In particular, measurement decreases in the amount of loan transfers and no measurement should be allowed when banks have transferred most of their loans. We relate our results to current accounting standards for asset transfers.

In theory, governments could protect against the potential economic devastation of future pandemics by requiring businesses to insure against pandemic-related risks. In practice, though, insurers do not currently offer pandemic insurance. Even assuming companies could obtain sufficient statistical data to reliably set pandemic underwriting standards and rate tables, the insurance industry is concerned that it lacks sufficient capacity to cover those risks, which are likely to occur worldwide and be highly correlated. Pandemics therefore are in the class of risks, like nuclear accidents, war, and terrorism, that are sometimes defined as “uninsurable,” at least by private markets. This Article focuses on using risk securitization—a relatively recent and innovative private-sector alternative to government insurance, funded by the issuance of catastrophe (“CAT”) bonds—to insure pandemic-related risks. Risk securitization would utilize the “deep pockets” of the global capital markets, which have a far greater capacity than the global insurance markets, to absorb these risks. The Article also examines how risk securitization could supplement public-private catastrophe insurance schemes, such as Chubb’s recent pandemic-coverage plan, to reduce the government’s shared exposure.

Can banks be induced to adopt an efficient risk-taking via market discipline? We seek an answer to this question within the context of banks diversifying into the other bank’s asset, which may potentially intensify a systemic risk. The central results of the paper are as follows. When creditors punish the bank’s excessive risk exposure by demanding higher risk premium, the bank owners’ optimal diversification will coincide with the diversification that maximizes the combined value of debt and equity. However, market discipline is effective in aligning the bank shareholders’ interest to that of the creditors only when the bank leverage ratios are at some modest levels. In addition, the effectiveness improves when diversification through securitization is allowed since tranching bank debt into a senior and a junior tranches enables avoiding the dark side of diversification and hence ensures both the individual and social optimality. While supporting capital adequacy and disclosure requirements of Basel III, our analysis warns the consequence of public backstops, that feeds the notion of ‘too-big-to-fail’, in undermining creditors’ incentive to monitor the banks and hence encouraging the latter to adopt excessive and socially sub-optimal risk-taking.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides mortgage forbearance relief to qualifying borrowers, whose loans are placed in a government backed mortgage pool. We analyze the effects of being ineligible for the program by examining the aftermath of the same requirement in the Home Affordable Refinance Program (HARP). Using a comparable sample of borrowers with Freddie Mac loans and privately securitized loans (Bbx) we compare loan performance and quantify potential wealth, consumption, and credit consequences for prime borrowers whose loans were placed in private securitization pools and who were thus ineligible for a government relief program. We show that restricting modification benefits to include only borrowers in federally backed mortgage pools results in significant loss in wealth (through reduced prepayment and increased default) for those otherwise similar borrowers whose loans are placed outside of GSE pools. The greatest detriment is documented in CBSAs with the largest housing price declines.

Fintech firms mobilize information technology to provide intermediation services using a broker methodology, whereas dealer banks intermediate using leveraged balance sheets. The integration of Fintech into banking may reduce the unit cost of intermediation by shifting the production function from dealer to broker. Identifying commonalities in the financial structures of Fintech-adopting banks, we develop the "Fintech score." Analysis of on-balance sheet lending, securitization, brokered deposits and non-interest income demonstrates that more broker-like (dealer-like) banks have high (low) Fintech scores. Using Data Envelopment and Stochastic Cost Frontier Analyses, banks with higher Fintech scores are more operationally efficient and resilient in crises.

This paper examines the notion of strategic ignorance in an earnings management context. Managers possess less information about loans subjected to securitization and auditors are aware of this shortcoming. Consistent with managers exploiting their own ignorance strategically and using loan loss provisions (LLP) of retained seller’s interest of securitized loans (SIL) more for earnings management than LLP of other loans, we find the use of LLP for income smoothing to be greater for banks that hold SIL. Moreover, the propensity to smooth income via LLP is increasing in the ratio of SIL to total loans. We also find that SIL is particularly useful for income smoothing in the fourth quarter, when greater auditor scrutiny makes it more difficult to manage earnings via LLP of non-securitized loans.

This paper analyzes mortgage lenders' strategy in pricing loans intended for sale to prime market. Using the Single-Family Loan-Level Data set obtained from Freddie Mac, we find evidence that lenders adjust their pricing behavior according to the changing lending environment. In particular, conditional on a rich set of loan and borrower characteristics, lenders heavily base the pricing decision on some unexplored neighborhood heterogeneities that cannot be explained by observed macro- and socio-economic factors in most of the year cohorts. Such regional disparities in mortgage rates attenuate remarkably in the subprime securitization boom, during which loan originators begin to shift their reliance from borrower’s neighborhood to variables reported to investors in setting mortgage rates. By contrast, the regional variations in mortgage rates become particularly pronounced in the run-up and the aftermath of the expansion of subprime securitization, when mortgage rates depend largely on borrower’s neighborhood and the reliance on reported variables is alleviated. These findings are indicative of a “spillover effect” of the differential pricing strategy from the subprime market to prime market in the sense that lender's reliance on borrower's neighborhood and hard information temporally complement each other. Moreover, the unexplored regional factors endowed with significant power in explaining the variations in mortgage rates are suggestive of regional-based discrimination in loan price.

In this paper, we explore dynamic changes in the capitalization of sea level rise (SLR) risk in housing and mortgage markets. Our results suggest a disconnect in coastal Florida real estate: From 2013-2018, home sales volumes in the most-SLR-exposed communities declined 16-20% relative to less-SLR-exposed areas, even as their sale prices grew in lockstep. Between 2018-2020, however, relative prices in these at-risk markets finally declined by roughly 5% from their peak. Lender behavior cannot reconcile these patterns, as we show that both all-cash and mortgage-financed purchases have similarly contracted, with little evidence of increases in loan denial or securitization. We propose a demand-side explanation for our findings where prospective buyers have become more pessimistic about climate change risk than prospective sellers. The lead-lag relationship between transaction volumes and prices in SLR-exposed markets is consistent with dynamics at the peak of prior real estate bubbles.

We build a competitive equilibrium model of securitization in the presence of demand for safety by some investors. Securitization allows to create safe assets by pooling idiosyncratic risks from loan originators, leading to higher aggregate loan issuance. Yet, the distribution of loan risks out of their originators creates a moral hazard problem. An increase in the demand for safety leads to a securitization boom and riskier originated loans. When demand for safety is high, welfare is Pareto higher than in an economy with no securitization despite the origination of riskier loans. Aggregate lending expansions driven by demand for safety may, paradoxically, lead to riskier loan issuance than expansions driven by standard credit supply shocks.

Does securitization distort the foreclosure decisions of non-performing mortgages? In a model of mortgage-backed securitization with an endogenous foreclosure policy, we find that the securitizing bank adopts a tougher foreclosure policy than the first-best, despite resulting in higher loan losses. This is optimal because foreclosure mitigates the adverse selection problem in securitization by making the optimal security, a risky debt, less information-sensitive. We further show that policies that limit mortgage foreclosure would discourage the bank’s ex ante screening effort, reducing the quality of securitized mortgages. Our model yields novel testable predictions on the effect of mortgage securitization on foreclosure rates, loan performance, and mortgage servicing.

We show that lenders charge higher interest rates for mortgages on properties exposed to a greater risk of sea level rise (SLR). This SLR premium is not evident in short-term loans and is not related to borrowers’ short-term realized default or creditworthiness. Further, the SLR premium is smaller when the consequences of climate change are less salient and in areas with more climate change deniers. Overall, our results suggest that mortgage lenders view the risk of SLR as a long-term risk, and that attention and beliefs are potential channels through which SLR risk is priced in residential mortgage markets.

In this study, we examine how banks’ stock price crash risk is affected by recourse uncertainty embedded in securitizations. By recourse uncertainty, we mean the difficulty for equity market participants to assess the true extent of risk transfer between securitizing banks and investors in asset-backed securities due to the opacity of securitizations. We argue that this uncertainty facilitates the withholding and accumulation of negative recourse news that is subsequently released at once, resulting in crashes. Using a sample of U.S. bank holding companies for the period of 2002-2015, we find that recourse uncertainty is positively associated with the future crash risk of securitizing banks. The result holds after controlling for bank intrinsic risk. We also predict and find that this association is higher for banks with poorer information environment and for the period before the adoption of SFAS 166/167, which required enhanced disclosure about securitization activities.

Show me a continent, country, region, state or city that is liquid, stable, and growing, with socio-political harmony, and I will show you it is optimizing its public assets. Show me one that is illiquid, unstable, and declining, with socio-political disharmony, and I will show you it is not optimizing its public assets. Assets can always be optimized to fix or rejuvenate other balance sheet and income statement items.

This study examines how seismic shocks impact mortgage lenders’ risk perception and therefore change their credit decisions. We find that noticeable but non-damaging earthquakes affected lenders’ pricing and sales strategies but not credit accessibility. Lenders were more likely to sell loans from the shaking Census tracts to the GSEs while raising the interest rate and the sales rate in the entire affected county area. Lenders’ responses were explained by increased risk salience instead of worsened borrowers’ creditworthiness or permanent collateral devaluation. Moreover, lenders’ access to local information, size, and sales capability influenced their ability to detect and transfer seismic risk.

The problems governments face in regulating consumer finance fall into two categories: normative and cognitive. The normative problems have to do with the way that some governments, particularly those adhering to an American model of household finance, have financed social mobility and intergenerational welfare through debt, a tenuous and socially risky policy choice. Credit has a substantial social aspect to it in the United States, where the federal government has in some way engaged in subsidizing about 1/3 of consumer credit, particularly in the residential mortgage market, feeding into a substantial capital markets dimension through government-guaranteed securitization. Most Americans think they “choose” and “earn” their wealth only through their own efforts, but in fact a substantial institutional apparatus of government assistance supports wealth creation, particularly for higher income households, including substantial disguised subsidies supporting home mortgage credit. Access to credit in such a system becomes a social primary good in need of regulation to ensure compliance with equality principles appropriate to the society in question. Governments have poor records in regulating access to credit and in some cases enact law or support social structures going in the opposite direction, towards injustice, substantially impairing the life chances of persons and families in historically disadvantaged groups, compounding status and material inequality. No government has as yet developed appropriate policy tools to evaluate the effects of financial regulation on equality. Rather, most policies have historically entrenched and even promoted inequality. The cognitive problems have to do with the dilemma of trading off between paternalism and autonomy in consumer financial regulation. Disclosure approaches fail because they do not adequately take the cognitive limitations of persons into account. Debtors do not read or understand terms and conditions. Paternalism can fail because capital can freely exit a market and engage in regulatory arbitrage in seeking out the best returns. If credit is what in a Rawlsian framework can be understood as a social primary good in a society then all of these problems are all the more serious. The solutions to these twin normative-cognitive problems are in either taking the distributive justice of access to credit seriously or in decoupling debt from its role in producing social mobility when this cannot be done. Debt can be ill-suited for allocating basic means to a good life in a society. It converts collective duties of justice owed to individuals to private duties of contract owed by individuals, aggravating power and domination dynamics in a society and worsening inequality.

We study a new type of securitization, mortgage-receivable-backed securities (MRBSs) issued by real estate developers. Unlike traditional mortgage-backed securities (MBSs), the major risk of underlying assets of MRBSs is payment delay instead of default and prepayment. Using unique loan-level data, we estimate proportional hazard models and detect factors that affect the risk of underlying assets of MRBSs, including bank characteristics, property-loan-household characteristics, local market conditions, and macroeconomic conditions. Especially, we find that the effects of house prices and LTVs on MRBS risk are the opposite of those on traditional MBS risk. Based on the estimates, we simulate cash flows of an underlying-asset pool and analyze the shortfall risk of the corresponding security tranches. We find that the securitization process imposes a natural adverse selection on the underlying assets. Our analyses provide a benchmark for conducting appropriate security designs based on the composition of the underlying asset pool, increase the transparency for investors on the risk pattern of MRBSs, and provide implications for pricing and regulation.

The value in 2018 of vehicles and equipment for consumer and business customers in Canada financed by the asset-based finance (ABF) industry was an estimated $416 billion. The ABF industry supports a broad network of dealers, manufacturers, distributors, vendors and brokers, and their customers throughout the country. ABF is offered by banks, credit unions, insurance companies, government financial institutions, manufacturer finance companies, and independent finance companies. Several of these entities are regulated with consequent access to existing Bank of Canada programs for emergency lending. This paper focuses on those entities – both regulated and unregulated – that may not have such access, and yet are critical to the functioning of the economy. ABF entities ran into deep trouble during the 2008-2009 global financial crisis and required an emergency liquidity program from the federal government that took months to devise and implement. The primary source of funding of the ABF sector was, and is, the asset-backed commercial paper and securitization markets, often with bank back-up or standby lines, purchased by private pools of investment capital – insurance companies, pension plans, hedge funds, banks and others. The 2008-2009 experience revealed that a complete loss of liquidity could occur within a few weeks, even days. Government was needed to step into the shoes of absent private-sector investors. Given the ABF industry’s relative success and low delinquencies, this Commentary recommends that, during periods of extraordinary financial market turmoil, the federal government activate a large-scale securitization program that would fund ABF intermediaries who finance customers based on real assets. The government would purchase asset-backed securities backed by a pool of assets and their receivables, receiving the same protection and profit that a privatesector investor would receive. Once liquidity is restored and private investor confidence returned, the commercial markets would again resume their normal functioning and government could withdraw its scaled-up temporary emergency funding program. The 2009 Federal Budget established the Canadian Secured Credit Facility, a $12 billion fund administered by The Business Development Bank of Canada (BDC) to purchase term asset-based securities (ABS) backed by loans and leases on vehicles and equipment. Since then, under successor programs, the BDC has continued to purchase ABS albeit on a smaller scale. With more than 10 years of experience, the BDC understands the policies and rules for such funding. Existing BDC programs could, therefore, be scaled up in a severe downturn, with experienced people in place for effective, prudent and efficient funding. In a profoundly disrupted market, the policy objective should be to restore liquidity to allow the financial services sector to continue offering financing to credit-worthy consumers and businesses in support of the Canadian economy, and that must include the ABF industry.

This paper argues that the following common patterns help explain the ongoing Islamic revival in Central Asia: (a) &ldquo, de-modern&rdquo, and &ldquo, ethnicized&rdquo, Islam as an enduring legacy of the Soviet period, (b) penetration of Salafism, (c) securitization of &ldquo, non-official&rdquo, Islam by state and non-state actors and (d) the rise of conservative Islam which goes hand in hand with retraditionalization. These factors, in their turn, pose serious challenges to developing inclusive society and human rights in Central Asian countries. This paper argues that the Islamic revival in Central Asian countries has come to the point when it can be analyzed under the prism, whether it impedes the development of inclusive society and human rights or not.

Around 2009, China’s economy has become the largest greenhouse-gas emitter. Climate protection policies have gradually entered the ‘high politics’ sphere in China particularly when climate and environmental protection have proved to be effective tools in achieving other political goals. When Xi Jinping came to power in 2012, China has entered into the “new normal” with a more comprehensive economic strategy that includes or even elevates a wide range of climate and environmental protection policies. China’s economic development is now shifting the balance of growth away from heavy-industrial investment and toward a more sustainable growth. Why – and how – did China change its tune? The key driver of change on the political importance of climate and environmental protection is China’s effort to recentralize governance. At the same time, while acknowledging that centralization is itself not the end but also a means to other political goals, this paper focuses on how the securitization of climate change and environmental protection has effectively served multiple purposes. It serves as a guiding principle on socioeconomic development and it serves as legitimacy to reestablish control by the Chinese Communist Party (CCP) with Xi at the helm. With the linkage of climate and environmental protection to these political goals, China’s experience becomes distinct from the usual securitization process. Also, China shows that while most political processes do not formally include democratic deliberation or the direct approval of an audience, climate and environmental protection does encourage more latent forms of participation not only of citizens, but of experts. Therefore, the process of securitization is also feasible in non-democratic societies

This article explores how state and non-state actors compete to promote or combat securitizing discourses about migration through different media in a Global South receiving country. Drawing on theories of framing and securitization, the article traces the ways in which migrants in Ecuador are securitized, and the types of actors that are most influential in proposing salient frames that are invoked to justify specific policies or practices. It examines the role of agency by analyzing the presence or absence of migrant voices and other non-state actors in influencing the framing of news stories and in concrete policy outcomes. The article employs multiple methods, including content analysis of more than 800 newspaper articles on migration in three Ecuadorian newspapers over eight years, frame analysis of more than 100 television news videos, and discourse and social network analysis of more than 400 tweets harvested in the aftermath of an anti-immigrant incident in 2019. Given the centering of European experiences in dominant securitization theories, this work contributes a Global South perspective that illuminates the role of power and authority in the diffusion of securitizing discourses. It shows that the social construction of migrant identity and framing profoundly affects the human security of migrants.

The purpose of this paper is to take stock of green securitization’s rationale, potential and pitfalls. It does so by first describing what green securitization is, and, identifying the diversity of asset-backed securities’ types used. The specificities of green securitization are illustrated with examples and two deeper case studies. A critical assessment on benefits, risks, costs and limitations of green securitization in fostering green finance is then provided. Before concluding, the paper also engages with public incentives and general public support measures that could sustain the growth of green securitization.

This paper is aimed at illustrating an innovative tool/strategy to address the general, wider and multifaceted NPL issue from a banking perspective, focusing in particular on UTP; a half-way strategy between a traditional “hold/forbearance” approach and a traditional “portfolio reduction” approach, producing a change in the type of exposure. Such a new, complementary, tool is aimed at overcoming market inefficiencies that other “traditional” approaches/tools currently present and, at the same time, helping to effectively reduce the legacy assets at bearable levels. At the same time this is a “debtor-level” approach that pursues the concentration and coordination of all the exposures of the banking system vis-a-vis the same debtor, as a precondition for a successful restructuring process of corporate borrowers in distress. Such a tool can be identified in a so called “Restructuring Fund”, a specific and peculiar kind of AIF.

Current business models have struggled to support early-stage drug development. In this paper, we study an alternative financing model, the mega-fund structure, to fund drug discovery. We extend the framework proposed in previous studies to account for correlation between phase transitions in drug development projects, thus making the model a more realistic representation of bio-pharma research and development. In addition, we update the parameters used in our simulation with more recent estimates of the probability of success (PoS). We find that the performance of the mega-fund becomes less attractive when correlation between projects is introduced. However, the risk of default and the expected returns of the vanilla mega-fund remain promising even under moderate levels of correlation. In addition, we find that a leveraged mega-fund outperforms an equity-only structure over a wide range of assumptions about correlation and PoS.

Based on a unique data set of European residential mortgage-backed security (RMBS) deals with 31 million quarterly loan observations, we examine how design features and labels of complex financial securities affect tranches’ spreads and loan performance. Exploiting the features required by the European Union’s Securitization Regulation and the STS (Simple, Transparent, Standardized) label, we find that the features of the security design and not the label are crucial for the loan performance. However, investors hardly consider the features but simply rely on the existence of the label.

When analysing the GFC and other crisis, it is important to identify the root cause(s), trigger(s) and amplifier(s). Crisis experience suggests that there is almost always a build-up period facilitated by one or more root causes. A set of root causes and amplifiers are needed for a market disruption as severe as GFC to come to existence. Without these, market disruption caused by trigger event is highly likely to be contained. GFC was a multifaceted disruption; it had various components which contributed to the build-up of the crisis and the resulting contagion. It was a reflection of structural flaws in the financial system, mainly in US. Often-quoted issues like excessive use of leverage, securitization, derivative markets and credit ratings are mostly a result of these structural flaws in the financial system. Problems relating to lack or lag of regulation and inadequate supervision also had a substantial role. FVA may have acted as an amplifier during the GFC. However, if any, its impact was limited. FVA has some serious flaws, like hypothetical market participant and her hypothetical assumptions, but it should be kept in mind that FVA standards are more of a strong guidance, not a straightforward recipe.