The effects of securitized asset portfolio specialization on bank holding company’s return, and risk

Purpose - The purpose of this paper is to examine the effect of specialization of the securitized assets portfolio on banks’ performance and securitization risk. In doing so, the paper addresses two important issues. First, whether the efficient risk–return trade-off for securitized asset portfolios is consistent with the principles of diversification. Second, whether the relationship between bank-level returns and securitized assets portfolio specialization is non-linear in securitization risk. Design/methodology/approach - This paper used the fixed-effects panel regression model on US bank holding company data for the period 2001:Q2 to 2014:Q1. Findings - The results show that securitized assets portfolio specialization increases returns and also reduces securitization default risk; banks’ return and securitized assets specialization are dependent in a non-linear manner on banks’ securitization risk. Additionally, it was also found that lower bank performance leads to higher securitization risk. Originality/value - This paper is of value by demonstrating that diversification (specialization) of securitized assets portfolio would achieve better bank performance in low-risk (high-risk) scenarios.