Skin-in-the-game in ABS transactions: a critical review of policy options

  • This paper applies the theory of structured finance to the regulation of asset backed securities. We find the current regulation in Europe (Article 405 of the CRR) and the US (Section D of Dodd-Frank Act) to be severely flawed with respect to its key intention: the imposition of a strict loss retention requirement. While nominal retention is always 5%, the true level of loss retention varies across available retention options between zero loss retention and full loss retention at the extreme ends. Based on a standard model of structured finance transactions, we propose a new risk retention metric RM measuring the level of an issuer’s skin-in-the-game. The new metric could help to achieve a better implementation of CRR/CRD-IV and DFA, by making disclosure of the RM-number compulsory for all ABS transactions. There are also implications for the operation of rating agencies. On a general level, the RM metric will be instrumental in achieving simplicity and transparency in securitizations (STS).

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Author:Jan Pieter KrahnenORCiDGND, Christian Wilde
Parent Title (English):SAFE policy white paper series, 46
Series (Serial Number):SAFE white paper series (46)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2017
Year of first Publication:2017
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2017/02/27
Tag:ABS; Dodd-Frank Act; STS (simple, transparent, and standardized securitizations); capital; regulation; retention; structured finance
Issue:February 6, 2017
Page Number:25
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht