Faculty of Economics and Business Administration Publications Database

A Note on Credit Risk Transfers and the Macroeconomy

Volume: 22
Number: 4
Pages: 1096 - 1111
Month: June
ISSN-Print: 1365-1005
Link External Source: Online Version
Year: 2018
Keywords: Credit Risk Transfer; Informational Externalities; Capital Recycling

The recent financial crisis highlighted the limits of the originate to distribute model of banking, but its nexus with the macroeconomy remains unexplored. I build a business cycle model with banks engaging in credit risk transfer (CRT) under informational externalities. Markets for CRT provide liquidity insurance to banks, but the emergence of a pooling equilibrium can also impair the banks' monitoring incentives. In normal times and in face of standard macro shocks the insurance benefits of CRT prevail and the business cycle is stabilized. In face of financial/liquidity shocks the extent of informational asymmetries is larger and the business cycle is amplified. The macro model with CRT can also reproduce well a number of macro and banking statistics over the period of rapid growth of this banks' business model.