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FRM Part II · FRM Exam Part II · An Introduction to Securitisation

Under the Basel securitisation framework, which statement best describes the purpose of the risk retention (skin in the game) requirement adopted by many regulators after the global financial crisis?

Risk retention requires the originator to keep an economic interest in the securitised exposures, so its incentives are aligned with investors. It targets the moral hazard of originate-to-distribute lending. It does not guarantee investor payoffs, replace due diligence, or provide capital relief for the retained amount.

  1. AIt guarantees investors against any loss on the senior tranche
  2. BIt aligns the originator's incentives with investors by requiring it to keep an economic interest in the securitised exposuresCorrect
  3. CIt removes the need for investors to perform their own due diligence
  4. DIt lets originators reduce capital by the amount retained

Explanation

Retention addresses the originate-to-distribute moral hazard by making the originator bear part of the losses. It does not guarantee investors, and investors must still do due diligence. Retained positions also attract capital and do not reduce it.

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