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This paper builds on recent research by Fender and Mitchell (2009) who show that if financial institutions securitize loans, retaining an interest in the equity tranche does not always induce the securitizer to diligently screen borrowers ex ante. We first determine the conditions under which this scenario becomes binding and further illustrate the implications for capital requirements. We then propose an extension to the existing model and also solve for optimal retention size. This also allows us to capture feedback effects from capital requirements into the maximization problem. Preliminary results show that equity tranche retention continues to best incentivize loan screening.

Asset-backed financing --- Securities --- Econometric models. --- Blue sky laws --- Capitalization (Finance) --- Investment securities --- Portfolio --- Scrip --- Securities law --- Underwriting --- Investments --- Investment banking --- Asset-backed securities --- Asset-based financing --- Asset securitization --- Securitization, Asset --- Corporations --- Covered bonds --- Law and legislation --- Finance --- Banks and Banking --- Finance: General --- Investments: Stocks --- Money and Monetary Policy --- Industries: Financial Services --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- General Financial Markets: Government Policy and Regulation --- Investment & securities --- Monetary economics --- Financial services law & regulation --- Stocks --- Loans --- Credit --- Credit risk --- Financial sector stability --- Financial risk management --- Financial services industry --- United States