Securitization and Bank Stability
AbstractThis 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 16831.
Date of creation: Feb 2009
Date of revision:
Bank stability; CDOs; Value-at-Risk; bank capital structure; Monte Carlo simulations;
Find related papers by JEL classification:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-22 (All new papers)
- NEP-BAN-2009-08-22 (Banking)
- NEP-REG-2009-08-22 (Regulation)
- NEP-RMG-2009-08-22 (Risk Management)
- NEP-URE-2009-08-22 (Urban & Real Estate Economics)
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