Title: Securitisation and the global financial crisis: can risk retention prevent another crisis?

Authors: Shanuka Senarath

Addresses: Department of Accounting Finance and Economics, Griffith University, Nathan (4111), QLD, Australia

Abstract: Prima facie securitisation played a prominent role in the recent global financial crisis. Moral hazard associated with securitisation is the key element behind the failure of securitisation. Risk retention is the US legislator's response to address the moral hazard issue associated with the originate-to-distribute model. This paper adopts a lexieconomic framework to analyse the risk retention provisions of the Dodd-Frank Act and proves that said provisions are not capable of eliminating moral hazard associated with securitisation. This paper argues that in order to ensure proper screening of the borrower, the cost for the lender for not engaging in proper screening and monitoring should be higher than the benefits she gains by not screening. Inter alia this paper further argues that the inclusion of non-recourse mortgages would make securitisation schemes susceptible to changes in home prices.

Keywords: securitisation; moral hazard; risk retention; Dodd-Frank Act; sub-prime mortgages.

DOI: 10.1504/IJBG.2017.081945

International Journal of Business and Globalisation, 2017 Vol.18 No.2, pp.153 - 166

Received: 27 Aug 2015
Accepted: 01 Oct 2015

Published online: 19 Dec 2016 *

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