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Effect of Securitization on the Bank’s Equity Risk in the U.S

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  • Pituwan Poramapojn

    ()
    (Faculty of Economics, Chulalongkorn University, Bangkok, Thailand)

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    Abstract

    This paper examines the relationship between the effect of securitization and the equity risk for bank holding companies in the United States from Q2:2001 to Q4:2008. Securitization markets in the U.S. expanded significantly in the early 2000s but have declined since 2007. This paper investigates four types of loans, namely, mortgage, consumer, commercial, and “other” loans (loans secured by real estate other than mortgage loans). When all types of loans are considered as a group, the effect of securitization (the net effect of increasing off-balance sheet loans and reducing on-balance sheet loans) is insignificant in relation to the banks’ equity risk. As a result, the banks use securitization as a financing source to fund new loans rather than as a risk reduction tool. The analysis of each type of loan indicates that the effect of the securitization of mortgage, consumer, and commercial loans is not significantly related to the banks’ equity risk; however, the effect of the securitization of “other” loans is statistically significant in raising the banks’ equity risk. The result shows that the banks still retain risk from securitization and that they use securitization as a financing source. Furthermore, during the subprime crisis, banks that securitized mortgage loans were exposed to risk from retained “credit-enhancing interest-only strips” rather than from the effect of securitization itself.

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    Bibliographic Info

    Article provided by Kasetsart University, Faculty of Economics, Center for Applied Economic Research in its journal Applied Economics Journal.

    Volume (Year): 19 (2012)
    Issue (Month): 1 (June)
    Pages: 68-86

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    Handle: RePEc:aej:apecjn:v:19:y:2012:i:1:p:68-86

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    Keywords: equity risk; loans; securitization; off-balance sheet;

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    References

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    1. Deming Wu & Jiawen Yang & Han Hong, 2011. "Securitization and Banks’ Equity Risk," Journal of Financial Services Research, Springer, vol. 39(3), pages 95-117, June.
    2. Brent Ambrose & Michael LaCour-Little & Anthony Sanders, 2005. "Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?," Journal of Financial Services Research, Springer, vol. 28(1), pages 113-133, October.
    3. Charles W. Calomiris & Joseph R. Mason, 2003. "Credit card securitization and regulatory arbitrage," Working Papers 03-7, Federal Reserve Bank of Philadelphia.
    4. Viral V. Acharya & Philipp Schnabl & Gustavo Suarez, 2010. "Securitization without risk transfer," NBER Working Papers 15730, National Bureau of Economic Research, Inc.
    5. Sara Malekan & Georges Dionne, 2012. "Securitization and Optimal Retention under Moral Hazard," Cahiers de recherche 1221, CIRPEE.
    6. G. Dionne & T. M. Harchaoui, 2002. "Banks’ Capital, Securitization and Credit Risk : An Empirical Evidence for Canada," THEMA Working Papers 2002-33, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    7. Simon Wolfe, 2000. "Structural effects of asset-backed securitization," The European Journal of Finance, Taylor & Francis Journals, vol. 6(4), pages 353-369.
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