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Securitization and moral hazard: Does security price matter?

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  • Liu, Luke

Abstract

This article analyses the effect of security price on the behaviour of bank securitization. We present a model of bank securitization in which security price together with liquid constraints create the incentive for banks to originate and sell assets backed securities to investors. Banks have a comparative advantage in locating and screening projects within their locality. Our results show that under the buyer’s market pricing mechanism the banks with different liquidity constraints can share the risk and the moral hazard problem is not serious; but under the seller’s market pricing mechanism the banks have the incentive to conduct strategic securitization and the moral hazard problem is serious. Our main idea has been supported by the subprime crisis broke in the US in 2007.

Suggested Citation

  • Liu, Luke, 2011. "Securitization and moral hazard: Does security price matter?," MPRA Paper 35004, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:35004
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    File URL: https://mpra.ub.uni-muenchen.de/38016/1/MPRA_paper_38016.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Securitization; Security price; Moral hazard;
    All these keywords.

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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