A Model of Banks' Asset Securitization Programs

We propose a new framework to analyze banks’ securitization programs. Our contributions include to provide an easy-to-use measure to determine how banks use proceeds, and to analyze their profit-maximizing behavior in... [ view full abstract ]

We propose a new framework to analyze banks’ securitization programs. Our contributions include to provide an easy-to-use measure to determine how banks use proceeds, and to analyze their profit-maximizing behavior in securitization. Specifically, we compute leverage before and after securitization by estimating their unobservable firm value. If the leverage does not improve, they may intend to pay out a dividend using sales proceeds, so we incorporate dividend payout as an optimal control problem of banks’ shareholders. We separate banks’ securitization to reduce leverage level from securitization to harvest profit earlier. Our model provides insights into why banks securitize their assets.