Some have argued for regulation to force banks who make (say) mortgage loans but then sell...

Some have argued for regulation to force banks who make (say) mortgage loans but then sell them off via a securitization to keep some of the securitization in their own portfolio.

What's a good reason to support, or a good reason to oppose, this sort of regulation?

Expert Solution

Banks generally securitize debt by pooling the certain type of debt and creating a new financial instrument from the pooled debt. Banks benefit from this by leverage of capital and and moving the default risk associated with debt off their balance sheet. Banks earn from origination fees through securitization.

The main reason to go for securitzation is risk management associated with debts like mortgages, car loan and credit card obligations. Banks can utilize their capital more efficiently by shifting their debt load and risk through securitization.

The main reason to support regulation to force banks to keep some of the securitization in their portfolio is to lower the risk of subprime crisis associated with mortgage backed security. Mortgage backed security are repackaged subprime mortgages into investments which are sold to investors. If all the subprime mortgages are sold to investors, there is a risk of default of these mortgages which will lead to subprime crisis as seen in recession period of 2008. Therefore, it is required banks to keep certain some of the securitization in their portfolio.

The reason to oppose this type of regulation will be that if bank keeps the securitization in their portfolio their will a risk of low liquidity and higher probability of bank's bankruptcy.

jeff jeffy answered 5 months ago

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Some have argued for regulation to force banks who make (say) mortgage loans but then sell...

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