Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/123753 
Authors: 
Year of Publication: 
2015
Series/Report no.: 
Bank of Canada Working Paper No. 2015-9
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper studies the efficiency of financial intermediation through securitization in a model with heterogeneous investment projects and asymmetric information about the quality of securitized assets. I show that when retaining part of the risk, the issuer of securitized assets may credibly signal its quality. However, in the boom stage of the business cycle this practice is inefficient, information on asset quality remains private, and lower-quality assets accumulate on balance sheets of financial intermediaries. This prolongs and deepens a subsequent recession with an intensity proportional to the length of the preceding boom. In recessions, the model also produces amplification of adverse selection problems on resale markets for securitized assets. These are especially severe after a prolonged boom period and when securitized high-quality assets are no longer traded. The model also suggests that improperly designed regulation requiring higher explicit risk retention may become counterproductive due to a negative general-equilibrium effect; i.e., it may adversely affect both the quantity and the quality of investment in the economy.
Subjects: 
Business fluctuations and cycles
Credit and credit aggregates
Economic models
Financial markets
Financial stability
Financial system regulation and policies
JEL: 
E32
E44
G20
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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