The effects of securitization for managing banking risk using alternative tranching schemes

Artikel

Diversification practices by banks affect their own risk of failing and the risk of the banking system as a whole (systemic risk). A seminal theoretical work has shown that linear diversification can reduce the risk of a bank failing, but at the cost of increasing systemic risk. Later, a follow-up study showed that a particular strategy of securitization with tranches can help avoid this trade-off. We extend the theoretical work on securitization by considering all possible strategies for securitization with two tranches, by finding their corresponding optimal diversification solutions, and by discussing their implications for individual and systemic risk. We show that securitization that involves exchanging a portion of both tranches brings back the dark side of diversification. In addition, we also show how different strategies of securitization can have risk amplification effects among banks when confidence shocks occur.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Journal of Risk and Financial Management ; ISSN: 1911-8074 ; Volume: 15 ; Year: 2022 ; Issue: 10 ; Pages: 1-25

Classification and Topics

• Classification: Management ; Portfolio Choice; Investment Decisions ; Information and Market Efficiency; Event Studies; Insider Trading ; General Financial Markets: Government Policy and Regulation ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Bankruptcy; Liquidation ; Mathematical and Quantitative Methods: General
• Subject: diversification ; securitization ; structured finance ; systemic risk

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cadenas, Pedro ; Gzyl, Henryk
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2022

Further information

• DOI: doi:10.3390/jrfm15100420
• Handle: http://hdl.handle.net/10419/274940
• Last update: 10.03.2025, 11:43 AM CET