Securitization and Aggregate Investment Efficiency
This paper studies the efficiency of competitive equilibria in economies where the expansion of credit is driven by securitization. We show that securitization, by its very nature, results in inefficient aggregate investment and thus provides justification for regulatory intervention. We examine the effectiveness of three real-world policy instruments to address this inefficiency: ex-ante capital / leverage requirements, skin-in-the game (retention) requirements and initiatives to improve transparency. We find that leverage/capital restrictions and improved transparency can increase welfare in our environment, but that forcing originators to hold additional skin-in-the game is never welfare improving.
Area: Commercial and Asset-based Finance (Assifact award)
Keywords: Securitization, pecuniary externalities, collateral constraints, financial frictions, macroprudential regulation, fire-sales, incomplete markets
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