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Arbitraging the Basel Securitization Framework: Evidence from German ABS Investment

Author

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  • Matthias EFFING

    (University of Geneva and Swiss Finance Institute)

Abstract

This paper uses data about bond holdings of banks domiciled in Germany to analyze adverse selection in the structured debt market. Within a group of asset-backed securities (ABS) with the same Basel II risk weight, banks tend to buy the ABS with the highest yield spreads, the most inflated credit ratings, and the worst collateral. The effect is more pronounced for banks operating with capital adequacy ratios close to the regulatory minimum requirement. The evidence suggests that regulatory arbitrage considerations influence the selection of ABS and that ratings inflation reinforces regulatory arbitrage as Basel II risk weights depend mechanically on credit ratings.

Suggested Citation

  • Matthias EFFING, 2014. "Arbitraging the Basel Securitization Framework: Evidence from German ABS Investment," Swiss Finance Institute Research Paper Series 14-65, Swiss Finance Institute, revised Dec 2015.
    • Handle: RePEc:chf:rpseri:rp1465
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    File URL: http://ssrn.com/abstract=2527981
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    More about this item

    Keywords

    Regulatory arbitrage; asset-backed securities; risk-taking; ratings inflation;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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