No. 1260 - Demand for safety, risky loans: a model of securitization

by Anatoli Segura Velez and Alonso Villacorta
February 2020
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This paper analyses the relationship between demand for safety and loan risk in a modern intermediation chain characterized by the distribution of a fraction of the loans issued by banks to intermediaries that securitize them.

A reduction in demand for safety in the economy, measured as the wealth share of highly risk adverse investors, leads to a reallocation of equity investments from banks to intermediaries engaging in securitization. This reallocation increases intermediaries' capacity to create safe assets and the risk of the loans issued by banks, which have fewer incentives to grant high-quality loans.

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  1. 12 February 2020
    No. 1260 - Demand for safety, risky loans: a model of securitization
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