Relative to a standard deposit contract, securitization with recourse can improve risk sharing because
A)the bank can partition the riskiness of the claims and therefore can sell the claims to investors with different risk preferences.
B)securitization with recourse is also backed by the FDIC.
C)securitization with recourse offers the investors an opportunity to obtain a riskless asset.
D)securitization with recourse allows the bank to generate higher profit.
E)none of the above

Question

Quizplus · Accepted Answer

By partitioning the riskiness of the claims, the bank can sell the claims to investors with different risk preferences, thus improving risk sharing. This means that investors who are willing to take on more risk can do so, while investors who prefer lower risk can also participate. This allows for a better distribution of risk and can ultimately lead to a more efficient allocation of capital. The other choices are incorrect because securitization with recourse is not backed by the FDIC, it does not offer investors a riskless asset, and while it may allow the bank to generate higher profits, this does not necessarily improve risk sharing.

Relative to a Standard Deposit Contract, Securitization with Recourse Can