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Foreign exposure to asset-backed securities of U.S. origin

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Author Info

  • Daniel O. Beltran
  • Laurie Pounder
  • Charles Thomas

Abstract

The financial turmoil which began in August 2007 originated, in part, because investors reassessed the quality of the assets underlying many asset-backed securities (ABS), particularly U.S. mortgages. The prominence of European banks in the early stages of the turmoil created the perception that foreigners held an outsized share of risky U.S. securities and prompted questions of why Europeans were so exposed. This paper evaluates that perception by quantifying foreign exposure to ABS with U.S. underlying collateral. Using the latest survey data on foreign portfolio holdings of U.S. securities, we find that the ultimate losses that foreigners could incur arising from U.S. underlying assets are small relative to most scale variables, although initial total mark-to-market losses are estimated to be significantly larger. Among other reasons for this difference between ultimate and initial losses, we demonstrate that the securitization chain can amplify mark-to-market price declines in the presence of uncertainty or illiquidity. Finally, we show that, relative to the size of the market, foreigners' holdings of U.S. mortgage-backed securities do not appear to be elevated compared with their holdings of other U.S. assets.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 939.

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Date of creation: 2008
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Handle: RePEc:fip:fedgif:939

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Keywords: Financial crises ; Asset-backed financing ; Mortgage-backed securities;

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References

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  1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
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Citations

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Cited by:
  1. Erika Brandner & Fang Cai & Ruth Judson, 2012. "Improving the measurement of cross-border securities holdings: the Treasury International Capital SLT," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue May, pages 1-28.
  2. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "Financial Crash, Commody Prices, and Global Inbalances," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 1-68.
  3. Carol Bertaut & Laurie Pounder DeMarco & Steve Kamin & Ralph Tryon, 2011. "ABS inflows to the United States and the global financial crisis," International Finance Discussion Papers 1028, Board of Governors of the Federal Reserve System (U.S.).
  4. Patrick Honohan, 2008. "Risk Management and the Costs of the Banking Crisis," National Institute Economic Review, National Institute of Economic and Social Research, vol. 206(1), pages 15-24, October.
  5. Patrick Honohan, 2008. "Bank Failures: The Limitations of Risk Modelling," The Institute for International Integration Studies Discussion Paper Series iiisdp263, IIIS.
  6. Bertaut, Carol & DeMarco, Laurie Pounder & Kamin, Steven & Tryon, Ralph, 2012. "ABS inflows to the United States and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 219-234.
  7. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "Financial Crash, Commodity Prices and Global Imbalances," NBER Working Papers 14521, National Bureau of Economic Research, Inc.
  8. Kamin, Steven B. & DeMarco, Laurie Pounder, 2012. "How did a domestic housing slump turn into a global financial crisis?," Journal of International Money and Finance, Elsevier, vol. 31(1), pages 10-41.
  9. Chaipat Poonpatpibul & Vasuveerapat Ramdecha & Krittinan Wiengwangchai & Pawinee Jitmongkolsa-mer, 2008. "Border of Monetary Policy in the New Financial State," Working Papers 2008-01, Economic Research Department, Bank of Thailand.
  10. Eric van Wincoop, 2011. "International Contagion Through Leveraged Financial Institutions," NBER Working Papers 17686, National Bureau of Economic Research, Inc.
  11. Erika Brandner & Fang Cai & Ruth Judson, 2012. "Improving the measurement of cross-border securities holdings: the Treasury International Capital SLT," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue May.
  12. Philip R. Lane, 2008. "The Macroeconomics of Financial Integration: A European Perspective," The Institute for International Integration Studies Discussion Paper Series iiisdp265, IIIS.
  13. Carol Bertaut & Laurie Pounder DeMarco & Steven B. Kamin & Ralph W. Tryon, 2011. "ABS Inflows to the United States and the Global Financial Crisis," NBER Working Papers 17350, National Bureau of Economic Research, Inc.

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