Broadly speaking, it is the type of risk that an entity decides to retain rather than transfer to other market players. Once retained, the risk becomes the responsibility of an entity to manage as part of its routine operations/ business activities.
In relation to securitization, risk retention implies that the originator, sponsor or original lender, in the structure, always retains a material net economic interest in the issues. Materiality of such an interest depends on several factors, particularly the proportions defined by a regulatory (e.g., 5%). The minimum interest requirements is meant to encourage securitizers to exercise more caution in the loan origination underwriting process.
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