A growing number of studies on the US subprime market highlight that, due to asymmetric information, credit risk transfer activities have perverse effects on banks' lending standards. We investigate the larger part of the market for securitized assets ("prime mortgages") in Italy, a country with a regulatory framework analogous to the one prevalent in Europe. Information on over a million of mortgages comprises loan-level variables, characteristics of the originating bank and, most importantly, contractual features of the securitization deal including the seniority structure of the ABS issued by the Special Purpose Vehicle and the amount retained by the originator. We borrow from the empirical contract theory literature (Chiappori and Salanié, 2000) a robust way to test for the effects of asymmetric information. Overall, our evidence suggests that banks can effectively contrast the negative effects of asymmetric information in the securitization market by selling less opaque loans, by using signaling devices (i.e. by retaining a share of the equity tranche ABS issued by the SPV) or by building up a reputation for not undermining their own lending standards.
Published in 2015 in: Journal of Monetary Economics, v. 71, pp. 33-49
