The Move Toward Risk Retention for Sponsors of Asset Backed Securities

Abstract

This paper will analyze the changes proposed by Dodd Frank's requirement for risk retention by sponsors of asset backed securities and consider the effect of the changes on reducing moral hazard problems for originators that previously had no “skin in the game.” The goal of the paper is to determine whether this shift in the law away from rating agencies and toward risk retention properly creates a safer market for securitized assets. There are three main concerns. First, is it necessary to reduce reliance on rating agencies? Second, if the law does reduce reliance on rating agencies, will the new proposals for risk retention create the proper incentives for sponsors to securitize only high quality assets? Finally, should there be exceptions to risk retention, and if so, how should the exceptions be defined?