DP12619 Skin-in-the-Game in ABS Transactions: A Critical Review of Policy Options

Author(s): Jan Pieter Krahnen, Christian Wilde
Publication Date: January 2018
Keyword(s): ABS, and standardized securitizations), Dodd-Frank Act, regulation, retention, Structured finance, STS (simple, transparent
JEL(s): G28
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12619

In response to the financial crisis, as a way to align incentives of originators and investors, new regulation in the US (Dodd-Frank) and the EU (CRR) requires issuers of asset backed securities to hold some skin-in-the-game, offering a set of options for risk retention. We propose an intuitive metric exposing effective risk retention and demonstrate that it varies widely across the available retention options. Requiring open disclosure of the metric, rather than demanding choice among arbitrarily specified and dissimilar retention options, would allow markets to price retention properly, and issuers to choose their desired retention level freely.