IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/119049.html
   My bibliography  Save this paper

Securitized banking, asymmetric information, and financial crisis: regulating systemic risk away

Author

Listed:
  • Bhattacharya, Sudipto
  • Chabakauri, Georgy
  • Nyborg, Kjell

Abstract

We develop a model of securitized (Originate, then Distribute) lending, in which both publicly observed aggregate shocks to values of securitized loan portfolios, and later some asymmetrically observed discernment of varying qualities of subsets thereof, play crucial roles. We find that originators and potential buyers of such assets may differ in their preferences over their timing of trades, leading to a reduction in the aggregate surplus accruing from securitization. In addition, heterogeneity in sellers' selected timing of trades - arising from differences in their ex ante beliefs - coupled with initial leverage choices based on pre-shock prices, may lead to financial crises, implying uncoordinated asset liquidations inconsistent with any inter-temporal market equilibrium. We consider and contrast two mitigating regulatory interventions: leverage restrictions, and ex ante specified resale price guarantees on securitized asset portfolios. We show that the latter tool performs strictly better than the former, by ensuring not only bank survival, but also enhanced social surplus arising from securitized lending. It does so by inducing a more coordinated market equilibrium, that does not lead to interim leverage buildup to support a "cherry picking" seller trading strategy.

Suggested Citation

  • Bhattacharya, Sudipto & Chabakauri, Georgy & Nyborg, Kjell, 2012. "Securitized banking, asymmetric information, and financial crisis: regulating systemic risk away," LSE Research Online Documents on Economics 119049, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119049
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/119049/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Zhiguo He & Wei Xiong, 2012. "Dynamic Debt Runs," The Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1799-1843.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. König, Philipp J. & Pothier, David, 2018. "Safe but fragile: Information acquisition, sponsor support and shadow bank runs," Discussion Papers 15/2018, Deutsche Bundesbank.
    2. S. Gabrieli & C.-P. Georg, 2014. "A network view on interbank market freezes," Working papers 531, Banque de France.
    3. Lin William Cong & Zhiguo He & Jiasun Li & Wei Jiang, 2021. "Decentralized Mining in Centralized Pools [Concentrating on the fall of the labor share]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1191-1235.
    4. Erwan Morellec & Philip Valta & Alexei Zhdanov, 2015. "Financing Investment: The Choice Between Bonds and Bank Loans," Management Science, INFORMS, vol. 61(11), pages 2580-2602, November.
    5. Eisenbach, Thomas M., 2017. "Rollover risk as market discipline: A two-sided inefficiency," Journal of Financial Economics, Elsevier, vol. 126(2), pages 252-269.
    6. Li, Yi, 2021. "Reciprocal lending relationships in shadow banking," Journal of Financial Economics, Elsevier, vol. 141(2), pages 600-619.
    7. Bruche, Max & Segura, Anatoli, 2017. "Debt maturity and the liquidity of secondary debt markets," Journal of Financial Economics, Elsevier, vol. 124(3), pages 599-613.
    8. Viral V. Acharya & Douglas Gale & Tanju Yorulmazer, 2011. "Rollover Risk and Market Freezes," Journal of Finance, American Finance Association, vol. 66(4), pages 1177-1209, August.
    9. Haoyang Liu & Zhaogang Song & James Vickery, 2021. "Defragmenting Markets: Evidence from Agency MBS," Staff Reports 965, Federal Reserve Bank of New York.
    10. Arvind Krishnamurthy, 2010. "How Debt Markets Have Malfunctioned in the Crisis," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 3-28, Winter.
    11. Ahnert, Toni & Bertsch, Christoph, 2013. "A wake-up call: information contagion and strategic uncertainty," Working Paper Series 282, Sveriges Riksbank (Central Bank of Sweden), revised 01 Mar 2014.
    12. Kai Quan Zhang & Hsing Hung Chen, 2017. "Environmental Performance and Financing Decisions Impact on Sustainable Financial Development of Chinese Environmental Protection Enterprises," Sustainability, MDPI, vol. 9(12), pages 1-14, December.
    13. Anna Bayona & Oana Peia & Razvan Vlahu, 2023. "Credit Ratings and Investments," Working Papers 776, DNB.
    14. Xuewen Liu, 2023. "A Model of Systemic Bank Runs," Journal of Finance, American Finance Association, vol. 78(2), pages 731-793, April.
    15. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    16. Xavier Vives, 2014. "Strategic Complementarity, Fragility, and Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 27(12), pages 3547-3592.
    17. Loriano Mancini & Angelo Ranaldo & Jan Wrampelmeyer, 2016. "The Euro Interbank Repo Market," The Review of Financial Studies, Society for Financial Studies, vol. 29(7), pages 1747-1779.
    18. Hakimi Abdelaziz & Boussaada Rim & Hamdi Helmi, 2022. "The Interactional Relationships Between Credit Risk, Liquidity Risk and Bank Profitability in MENA Region," Global Business Review, International Management Institute, vol. 23(3), pages 561-583, June.
    19. Zhang, Lei & Zhang, Lin & Zheng, Yong, 2013. "Wholesale Funding, Coordination, and Credit Risk," CAGE Online Working Paper Series 124, Competitive Advantage in the Global Economy (CAGE).
    20. König, Philipp Johann & Mayer, Paul & Pothier, David, 2022. "Optimal timing of policy interventions in troubled banks," Discussion Papers 10/2022, Deutsche Bundesbank.

    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:119049. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.