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

Publication: White Paper No. 46
Topic Area: Financial Markets
Authors: Jan Pieter Krahnen,
Christian Wilde
Date: Oct 2017
Keywords: Structured finance, ABS, STS (simple, transparent, and standardized securitizations), regulation, retention, Dodd-Frank Act

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.

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