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

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

Jan Pieter Krahnen, Christian Wilde

Series number :

Serial Number: 
549/2018

Date posted :

January 22 2018

Last revised :

January 22 2018
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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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Authors

Professor
Real name: 
Jan Pieter Krahnen
Research Member
Center for Financial Studies (CFS), Research Center SAFE, Goethe University Frankfurt
Real name:
Christian Wilde