Mandatory retention rules and bank risk / by Yuteng Cheng.: FB3-5/2023-3E-PDF

"This paper studies, theoretically and empirically, the unintended consequences of mandatory retention rules in securitization. The Dodd-Frank Act and the EU Securitisation Regulation both impose a 5% mandatory retention requirement to motivate screening and monitoring. I first propose a novel model showing that while retention strengthens monitoring, it may also encourage banks to shift risk. I then provide empirical evidence supporting this unintended consequence: in the US data, banks shifted toward riskier portfolios after the implementation of the retention rules embedded in Dodd-Frank"--Abstract.

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