Securitization and the dark side of diversification

M.R.C. Van Oordt

doi:10.1016/j.jfi.2013.05.001

Securitization and the dark side of diversification

M.R.C. Van Oordt

Research output: Contribution to Journal › Article › Academic › peer-review

Abstract

Diversification by banks affects the systemic risk of the sector. Importantly, Wagner (2010) shows that linear diversification increases systemic risk. We consider the case of securitization, whereby loan portfolios are sliced into tranches with different seniority levels. We show that tranching offers nonlinear diversification strategies, which can reduce the failure risk of individual institutions beyond the minimum level attainable by linear diversification without increasing systemic risk. © 2013 Elsevier Inc.

Original language	English
Pages (from-to)	214-231
Journal	Journal of Financial Intermediation
Volume	23
Issue number	2
DOIs	https://doi.org/10.1016/j.jfi.2013.05.001
Publication status	Published - Apr 2014
Externally published	Yes

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10.1016/j.jfi.2013.05.001

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Securitization and the Dark Side of Diversification: Proof that No Diversification is Optimal for Bank Shareholders
van Oordt, M., 30 Apr 2014.
Research output: Working paper / Preprint › Working paper › Academic

Cite this

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title = "Securitization and the dark side of diversification",

abstract = "Diversification by banks affects the systemic risk of the sector. Importantly, Wagner (2010) shows that linear diversification increases systemic risk. We consider the case of securitization, whereby loan portfolios are sliced into tranches with different seniority levels. We show that tranching offers nonlinear diversification strategies, which can reduce the failure risk of individual institutions beyond the minimum level attainable by linear diversification without increasing systemic risk. {\textcopyright} 2013 Elsevier Inc.",

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AB - Diversification by banks affects the systemic risk of the sector. Importantly, Wagner (2010) shows that linear diversification increases systemic risk. We consider the case of securitization, whereby loan portfolios are sliced into tranches with different seniority levels. We show that tranching offers nonlinear diversification strategies, which can reduce the failure risk of individual institutions beyond the minimum level attainable by linear diversification without increasing systemic risk. © 2013 Elsevier Inc.

U2 - 10.1016/j.jfi.2013.05.001

DO - 10.1016/j.jfi.2013.05.001

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Securitization and the dark side of diversification

Abstract

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Research output

Securitization and the Dark Side of Diversification: Proof that No Diversification is Optimal for Bank Shareholders

Cite this