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Securitization and Bank Stability

  • Di Cesare, Antonio

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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File URL: https://mpra.ub.uni-muenchen.de/16831/1/MPRA_paper_16831.pdf
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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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  1. Yener Altunbas & Leonardo Gambacorta & David Marques, 2008. "Securitization and the bank lending channel," Proceedings 1101, Federal Reserve Bank of Chicago.
  2. Jan Pieter Krahnen & Christian Wilde, 2008. "Risk Transfer with CDOs," Working Paper Series: Finance and Accounting 187, Department of Finance, Goethe University Frankfurt am Main.
  3. Jeffery D Amato & Eli M Remolona, 2003. "The credit spread puzzle," BIS Quarterly Review, Bank for International Settlements, December.
  4. 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.
  5. 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.
  6. Francis A. Longstaff & Arvind Rajan, 2008. "An Empirical Analysis of the Pricing of Collateralized Debt Obligations," Journal of Finance, American Finance Association, vol. 63(2), pages 529-563, 04.
  7. 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.
  8. Marcello Bofondi & Giorgio Gobbi, 2006. "Informational Barriers to Entry into Credit Markets," Review of Finance, European Finance Association, vol. 10(1), pages 39-67.
  9. 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.
  10. 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.
  11. Alan Greenspan, 2005. "Risk transfer and financial stability," Proceedings 968, Federal Reserve Bank of Chicago.
  12. Jiménez, Gabriel & Ongena, Steven & Peydró, José Luis & Saurina, Jesús, 2007. "Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk?," CEPR Discussion Papers 6514, C.E.P.R. Discussion Papers.
  13. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
  14. 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.
  15. Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 389-411, June.
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