Abstract
Securitization involves both the risk allocation and claims' transferability/liquidity. A key ingredient of liquidity/claim‐transferability is bankruptcy remoteness of the securitized assets. We analyze the implications of the bankruptcy‐remoteness created by securitization on risk allocation and bank monitoring incentives, in relation to the bank's liability structure; and the regulatory/policy issues it gives rise to. We demonstrate that (1) the need for regulation arises when securitization (and bankruptcy remoteness) coexists with deposit‐taking; and (2) regulation that imposes the same capital requirements on a bank irrespective of whether loans are securitized or not will have welfare implications. We also explain the need for narrow‐securitized banking.
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