Risk Retention in Securitisation and Empty Creditors When Financial Regulation (Positively) Spills Over Corporate Governance

The risk retention rule was introduced in the US and the EU as a mechanism to curb the originate-to-distribute model, associated with securitisations and the financial crisis of 2008. this article argues that besides its original financial stability rationale, the rule has positive spillovers on debt governance and specifically on the incentives to monitor, the design of covenants and the lender's stance during renegotiation and bankruptcy (the ‘empty creditor' problem). Risk retention in true sale securitisations makes the strongest case for debt governance, although the existence of various options of retention appears to be associated with varying incentives. For cases where monitoring is performed by a party different than the originator, the introduction of retention by the servicer is a promising although partial solution. the mechanism and effects of risk retention on synthetic securitisations remain ambivalent, given the perverse incentives associated with over-insurance (negative economic ownership). however, the upcoming restriction of double hedging for synthetic StS transactions is a positive development.