With hindsight, the subprime crisis highlighted the importance of high correlation regimes and systemic risks and contagion. It is mainly about them that this paper will focus on, in the context of the liquid index tranches but also for European Prime RMBS and SME securitizations.

We consider a simple model of lending and borrowing combining two informational problems: adverse selection and costly state verification. Our analysis highlights the interaction between these two informational problems. We notably show that the higher the monitoring cost, the less...