This evidence is inconsistent with explanations for holdings of highly-rated tranches that emphasize the incentives of banks deemed “too-big-to-fail”. Further, the evidence does not provide support for “bad incentives” theories of holdings of highly-rated tranches. We find, however, that banks active in securitization held more highly-rated tranches. Such a result can be consistent with regulatory arbitrage as well as with securitizing banks holding highly-rated tranches to convince investors of the quality of these securities. Our evidence supports the latter hypothesis.
Correcting misconceptions about markets, economics, asset prices, derivatives, equities, debt and finance
Monday, August 8, 2011
Evidence Against "Too Big To Fail" Incentive As Cause Of Bank Over Investment In Securitizations
Posted By Milton Recht
From "Why Did U.S. Banks Invest in Highly-Rated Securitization Tranches?" by Isil Erel, Taylor D. Nadauld and René M. Stulz, NBER Working Paper No. 17269, Issued in August 2011:
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