Risk transfer with CDOs and systemic risk in bankingfam
AbstractLarge banks often sell part of their loan portfolio in the form of collateralized debt obligations (CDO) to investors. In this paper we raise the question whether credit asset securitization affects the cyclicality (or commonality) of bank equity values. The commonality of bank equity values reflects a major component of systemic risks in the banking market, caused by correlated defaults of loans in the banks loan books. Our simulations take into account the major stylized fact of CDO transactions, the nonproportional nature of risk sharing that goes along with tranching. We provide a theoretical framework for the risk transfer through securitization that builds on a macro risk factor and an idiosyncratic risk factor, allowing an identification of the types of risk that the individual tranche holders bear. This allows conclusions about the risk positions of issuing banks after risk transfer. Building on the strict subordination of tranches, we first evaluate the correlation properties both within and across risk classes. We then determine the effect of securitization on the systematic risk of all tranches, and derive its effect on the issuing banks equity beta. The simulation results show that under plausible assumptions concerning bank reinvestment behaviour and capital structure choice, the issuing intermediarys systematic risk tends to rise. We discuss the implications of our findings for financial stability supervision. --
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2006/04.
Date of creation: 2006
Date of revision:
Contact details of provider:
Postal: House of Finance, Grüneburgplatz 1, HPF H5, D-60323 Frankfurt am Main
Phone: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
Web page: http://www.ifk-cfs.de/
More information through EDIRC
Risk Transfer; Systematic Risk; Systemic Risk;
Find related papers by JEL classification:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Instefjord, Norvald, 2005. "Risk and hedging: Do credit derivatives increase bank risk?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(2), pages 333-345, February.
- Greenbaum, Stuart I. & Thakor, Anjan V., 1987. "Bank funding modes : Securitization versus deposits," Journal of Banking & Finance, Elsevier, Elsevier, vol. 11(3), pages 379-401, September.
- GÃ¼nter Franke & Jan Pieter Krahnen, 2005.
"Default risk sharing between banks and markets: the contribution of collateralized debt obligations,"
CoFE Discussion Paper, Center of Finance and Econometrics, University of Konstanz
05-04, Center of Finance and Econometrics, University of Konstanz.
- Gunter Franke & Jan Pieter Krahnen, 2007. "Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations," NBER Chapters, in: The Risks of Financial Institutions, pages 603-634 National Bureau of Economic Research, Inc.
- 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).
- Guenter Franke & Jan Pieter Krahnen, 2005. "Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations," NBER Working Papers 11741, National Bureau of Economic Research, Inc.
- Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(10), pages 2577-2603, October.
- G.G. Kaufman, 2000. "Banking and Currency Crises and Systemic Risk: A Taxonomy and Review," DNB Staff Reports (discontinued), Netherlands Central Bank 48, Netherlands Central Bank.
- Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
- Ingo Fender & Janet Mitchell, 2009.
"Incentives and tranche retention in securitisation: a screening model,"
BIS Working Papers
289, Bank for International Settlements.
- Fender, Ingo & Mitchell, Janet, 2009. "Incentives and Tranche Retention in Securitisation: A Screening Model," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7483, C.E.P.R. Discussion Papers.
- Ingo Fender & Janet Mitchell, 2009. "Incentives and tranche retention in securitisation : a screening model," Working Paper Research, National Bank of Belgium 177, National Bank of Belgium.
- CarbÃ³-Valverde, Santiago & Marques-Ibanez, David & RodrÃguez-FernÃ¡ndez, Francisco, 2012. "Securitization, risk-transferring and financial instability: The case of Spain," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(1), pages 80-101.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).
If references are entirely missing, you can add them using this form.