Bankruptcy remoteness and incentive-compatible securitization

Securitization involves both the risk allocation and claims’ transferability/liquidity. A key ingredient of liquidity/claim-transferability is bankruptcy remoteness of the securitized assets.We analyze the implications of the bankruptcy-remoteness created by securitization on risk allocation and bank monitoring incentives, in relation to the bank’s liability structure; and the regulatory/policy issues it gives rise to. We demonstrate that (1) the need for regulation arises when securitization (and bankruptcy remoteness) coexists with deposittaking; and (2) regulation that imposes the same capital requirements on a bank irrespective of whether loans are securitized or not will have welfare implications. We also explain the need for narrow-securitized banking.