Securitization with Implicit Recourse : Some thoughts on the Economic Rationale

Asset-backed securitization transactions that are structured to achieve a true sale of the underlying assets, i.e. a legal change of ownership, are usually performed “non-recourse.” However, many securitization transactions show signs of implicit recourse, i.e., the granting of non-contractual stipulated support activities of a transaction provided by the originator. The motivation to act as such lies in the originator's moral hazard to retain his reputation and capital market access. While such measures are officially illegal and regulators stipulate disciplinary consequences, they often tend to ignore such actions. This article analyzes the economic rationale behind the phenomenon of granting implicit recourse in ”non-recourse” securitizations. First, an overview of multiple empirical research shows evidence for the existence of implicit recourse activities in general and even some economic advantages of such measures. Next, a theoretical model based on Benveniste and Berger [1987] shows that recourse can add value to capital market efficiency, because it mitigates the problem of information asymmetry that occurs when financial intermediaries sell theirs assets. Implicit recourse in securitization transactions might also help to better allocate risk among capital market investors. These theoretical and empirical considerations help us understand the functionality of securitization and of the capital market and its participants