Download or read book Asset Securitization and Optimal Retention written by John Kiff and published by International Monetary Fund. This book was released on 2010-03-01 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper builds on recent research by Fender and Mitchell (2009) who show that if financial institutions securitize loans, retaining an interest in the equity tranche does not always induce the securitizer to diligently screen borrowers ex ante. We first determine the conditions under which this scenario becomes binding and further illustrate the implications for capital requirements. We then propose an extension to the existing model and also solve for optimal retention size. This also allows us to capture feedback effects from capital requirements into the maximization problem. Preliminary results show that equity tranche retention continues to best incentivize loan screening.