DP14313 Demand for safety, risky loans: A model of securitization

Author(s):	Anatoli Segura, Alonso Villacorta
Publication Date:	January 2020
Date Revised:	June 2020
Keyword(s):	Diversification, moral hazard, Originate-to-distribute, Safety demand, Securitization
JEL(s):	G01, G20, G28
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=14313

We build a competitive equilibrium model of securitization in presence of demand for safety by debt investors. Securitization vehicles create safe assets by pooling idiosyncratic risks from loan originators. Equity is endogenously allocated to provide skin-in-the-game in originators and loss-absorption against aggregate risk in vehicles. Credit expansions driven by increases in safety demand lead to securitization booms and riskier loans. They also induce reallocations of equity towards junior tranches of securitized assets that may increase loan risk and reduce output relative to standard credit supply expansions. We find novel predictions on loan and equity risk premia consistent with empirical evidence.