Security Contract Design under Asymmetric Information

This paper considers the optimal design of Asset backed securities (ABS) under asymmetric information. Securitization improves bank's liquidity in capital markets by removing the issued loans from its balance sheet and using the saved capital to originate new loans: But securitization is doubted by the recent financial crisis in 2007. One concern that frequently questioned is that securitization under asymmetric information leads to moral hazard in lender screening and monitoring. We discussed the moral hazard problem using a principal-agent model and show that the designment of securitization must contain a retention clause for moral hazard.