Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297388 
Authors: 
Year of Publication: 
2023
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2023-3
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper studies, theoretically and empirically, the unintended consequences of mandatory retention rules in securitization. The Dodd-Frank Act and the EU Securitisation Regulation both impose a 5% mandatory retention requirement to motivate screening and monitoring. I first propose a novel model showing that while retention strengthens monitoring, it may also encourage banks to shift risk. I then provide empirical evidence supporting this unintended consequence: in the US data, banks shifted toward riskier portfolios after the implementation of the retention rules embedded in Dodd-Frank. Furthermore, the model offers clear, testable predictions about policy and corresponding consequences. In the US data, stricter retention rules caused banks to monitor and shift risk simultaneously. According to the model prediction, such a simultaneous increase occurs only when the retention level is above optimal, which suggests that the current rate of 5% in the US is too high.
Subjects: 
Financial institutions
Financial system regulation and policies
Credit risk management
JEL: 
G21
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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