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Securitization and Bank Stability

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  • Di Cesare, Antonio

Abstract

This paper analyzes the effects of CDO issuance on the risk of default of banks. Previous literature showed that the overall riskiness of a bank can increase when it sells part of the loans in its portfolio by issuing a CDO of which it retains the equity tranche. Using Monte Carlo simulations, this paper confirms previous results but also highlights that they can change substantially if one modifies the hypothesis regarding how the proceeds of securitizations are reinvested. The assessment of the effects of securitizations on bank stability is thus mainly a matter of empirical research. Using data for Italian banks I provide evidence that the securitization activity has been a relevant factor in changing the composition of the asset side of banks' balance sheets. Results also show that these changes have probably contributed to lower the average ex-ante riskiness of Italian banks. I also compare the riskiness of loans that have been securitized with that of new loans granted by the same securitizing banks using loan-by-loan data. Results show that new loans are on average riskier than loans that have been securitized, thus pointing to an increasing amount of risk to be born by banks as a consequence of the reinvestment of the proceeds of securitizations.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16831.

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Date of creation: Feb 2009
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Handle: RePEc:pra:mprapa:16831

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Keywords: Bank stability; CDOs; Value-at-Risk; bank capital structure; Monte Carlo simulations;

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References

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  1. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
  2. Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, Elsevier, vol. 35(3), pages 389-411, June.
  3. Marcello Bofondi & Giorgio Gobbi, 2006. "Informational Barriers to Entry into Credit Markets," Review of Finance, European Finance Association, European Finance Association, vol. 10(1), pages 39-67.
  4. Francis A. Longstaff & Arvind Rajan, 2006. "An Empirical Analysis of the Pricing of Collateralized Debt Obligations," NBER Working Papers 12210, National Bureau of Economic Research, Inc.
  5. Franke, Günter & Krahnen, Jan Pieter, 2005. "Default risk sharing between banks and markets: The contribution of collateralized debt obligations," CFS Working Paper Series 2005/06, Center for Financial Studies (CFS).
  6. Krahnen, Jan Pieter & Wilde, Christian, 2008. "Risk transfer with CDOs," CFS Working Paper Series 2008/15, Center for Financial Studies (CFS).
  7. Yener Altunbas & Leonardo Gambacorta & David Marqués, 2007. "Securitisation and the bank lending channel," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 653, Bank of Italy, Economic Research and International Relations Area.
  8. Charles T. Carlstrom & Katherine A. Samolyk, 1993. "Loan sales as a response to market-based capital constraints," Working Paper 9313, Federal Reserve Bank of Cleveland.
  9. Krahnen, Jan Pieter & Wilde, Christian, 2006. "Risk Transfer with CDOs and Systemic Risk in Banking," CEPR Discussion Papers 5618, C.E.P.R. Discussion Papers.
  10. Cousseran, O. & Rahmouni, I., 2005. "The CDO market Functioning and implications in terms of financial stability," Financial Stability Review, Banque de France, issue 6, pages 43-62, June.
  11. Jiminez, G. & Ongena, S. & Saurina, J., 2007. "Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk?," Discussion Paper, Tilburg University, Center for Economic Research 2007-75, Tilburg University, Center for Economic Research.
  12. Bannier, Christina E. & Hänsel, Dennis N., 2007. "Determinants of banks' engagement in loan securitization," Frankfurt School - Working Paper Series 85, Frankfurt School of Finance and Management.
  13. Alan Greenspan, 2005. "Risk transfer and financial stability," Proceedings 968, Federal Reserve Bank of Chicago.
  14. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, Econometric Society, vol. 67(1), pages 65-100, January.
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Cited by:
  1. Affinito, Massimiliano & Tagliaferri, Edoardo, 2010. "Why do (or did?) banks securitize their loans? Evidence from Italy," Journal of Financial Stability, Elsevier, Elsevier, vol. 6(4), pages 189-202, December.
  2. Massimiliano Affinito & Edoardo Tagliaferri, 2010. "Why do (or did?) banks securitize their loans? Evidence from Italy," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 741, Bank of Italy, Economic Research and International Relations Area.

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