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Loss Allocation in Securitization Transactions

Author

Listed:
  • Günter Franke

    (Department of Economics, University of Konstanz, Germany)

  • Markus Herrmann

    (Landesbank Baden-Württemberg, Germany)

  • Thomas Weber

    (Axpo Holding AG (Baden) Aargau, Switzerland)

Abstract

This paper analyses the loss allocation to First, Second and Third Loss Positions in European collateralized debt obligation transactions. The quality of the underlying asset pool plays a predominant role for the loss allocation. A lower asset pool quality induces the originator to take a higher First Loss Position, but, in a synthetic transaction, a smaller Third Loss Position. The share of expected default losses, borne by the First Loss Position, is largely independent of asset pool quality, but lower in securitizations of corporate loans than in those of corporate bonds. Originators with a good rating and low Tobin´s Q prefer synthetic transactions.

Suggested Citation

  • Günter Franke & Markus Herrmann & Thomas Weber, 2011. "Loss Allocation in Securitization Transactions," Working Paper Series of the Department of Economics, University of Konstanz 2011-22, Department of Economics, University of Konstanz.
    • Handle: RePEc:knz:dpteco:1122
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    File URL: http://www.uni-konstanz.de/FuF/wiwi/workingpaperseries/WP_22-11-Franke-Herrmann-Weber.pdf
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    Citations

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    Cited by:

    1. Krahnen, Jan Pieter & Wilde, Christian, 2017. "Skin-in-the-game in ABS transactions: A critical review of policy options," SAFE White Paper Series 46, Leibniz Institute for Financial Research SAFE.
    2. Gauthier, Laurent, 2019. "Securitization Structures and Security Design," MPRA Paper 95168, University Library of Munich, Germany.
    3. Deku, Solomon Y. & Kara, Alper & Marqués-Ibáñez, David, 2019. "Do reputable issuers provide better-quality securitizations?," Working Paper Series 2236, European Central Bank.
    4. Solomon Y. Deku & Alper Kara & Nodirbek Karimov, 2021. "Do investors value frequent issuers in securitization?," Review of Quantitative Finance and Accounting, Springer, vol. 57(4), pages 1247-1282, November.
    5. Krahnen, Jan-Pieter & Wilde, Christian, 2022. "Skin-in-the-game in ABS transactions: A critical review of policy options," Journal of Financial Stability, Elsevier, vol. 60(C).
    6. Guo, Guixia & Wang, Frank Yong & Wei, Xu, 2014. "Optimal tranching with diverse beliefs," Economics Letters, Elsevier, vol. 124(2), pages 222-226.
    7. Wojtowicz, Marcin, 2014. "CDOs and the financial crisis: Credit ratings and fair premia," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 1-13.
    8. Günter Franke, 2013. "Known Unknowns in Verbriefungen," Schmalenbach Journal of Business Research, Springer, vol. 65(67), pages 1-34, January.
    9. Sascha Tobias Wengerek & Benjamin Hippert & André Uhde, 2019. "Risk allocation through securitization - Evidence from non-performing loans," Working Papers Dissertations 58, Paderborn University, Faculty of Business Administration and Economics.
    10. Franke, Günter & Krahnen, Jan Pieter, 2017. "SME funding without banks? On the interplay of banks and markets," SAFE White Paper Series 44, Leibniz Institute for Financial Research SAFE.
    11. Deku, Solomon Y. & Kara, Alper & Marques-Ibanez, David, 2022. "Bank reputation and securitization quality: European evidence," Finance Research Letters, Elsevier, vol. 46(PB).
    12. Fenner, Arved & Klein, Philipp & Mössinger, Carina, 2021. "Better be careful: The replenishment of ABS backed by SME loans," Discussion Papers 30/2021, Deutsche Bundesbank.
    13. Wengerek, Sascha Tobias & Hippert, Benjamin & Uhde, André, 2022. "Risk allocation through securitization: Evidence from non-performing loans," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 48-64.

    More about this item

    Keywords

    Securitization; collateralized debt obligations; asset pool quality; First Loss Position; synthetic transactions.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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

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