By Rodolfo Campos, Professor at IESE. For banks to successfully regulate securitization, they must properly specify a model of what they hope to achieve with the measure. As a first step, this subproject will present a justification of securitization that is analogous to the justification of the existence of banks in Diamond and Rajan (2001). Securitization is emerging as the best contract between an institution that has conceded loans which it must recoup, and its investors. In particular, securitization with recourse solves the problem of the lack of incentives for the moneylender to make an effort to recoup loans that have been securitized.

Specifically, this model entails considering an infinitely repeating version of that put forth by Diamond and Rajan. Furthermore, if the bank's actions are observed imperfectly, then the model implies that the securitizing institution strictly dominates the practices of traditional banks. This provides a complete, well-specified model of the efficiency gains of securitization. Study will be done on the forms of relating the model's parameters with accounting and financial variables.

A secondary phase of the subproject will analyze the implications of regulation when there is a trade-off between the increased efficiency of securitization and the costs of the systematic increase of banks' fragility in the case of a recession. In particular, complementarity in the process of bank securitization plays an important role with regard to the effect of the recession on the probability of a financial crisis. This second phase will include an evaluation of the effects of regulation on the potential gains and losses attributable to the practice of securitization.