Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/274940 
Year of Publication: 
2022
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 15 [Issue:] 10 [Article No.:] 420 [Year:] 2022 [Pages:] 1-25
Publisher: 
MDPI, Basel
Abstract: 
Diversification practices by banks affect their own risk of failing and the risk of the banking system as a whole (systemic risk). A seminal theoretical work has shown that linear diversification can reduce the risk of a bank failing, but at the cost of increasing systemic risk. Later, a follow-up study showed that a particular strategy of securitization with tranches can help avoid this trade-off. We extend the theoretical work on securitization by considering all possible strategies for securitization with two tranches, by finding their corresponding optimal diversification solutions, and by discussing their implications for individual and systemic risk. We show that securitization that involves exchanging a portion of both tranches brings back the dark side of diversification. In addition, we also show how different strategies of securitization can have risk amplification effects among banks when confidence shocks occur.
Subjects: 
diversification
securitization
structured finance
systemic risk
JEL: 
G11
G14
G18
G21
G33
C00
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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