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Arbitraging the Basel securitization framework: Evidence from German ABS investment

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  • Matthias Efing

Abstract

This paper provides evidence for regulatory arbitrage within the class of asset-backed securities (ABS) based on individual asset holding data of German banks. I find that banks operating with tight regulatory constraints exploit the low risk-sensitivity of rating-contingent capital requirements for ABS. Unlike unconstrained banks they systematically pick the securities with the highest yield and the lowest collateral performance among ABS with the same regulatory risk weight. This reaching for yield allows constrained banks to increase the return on the capital required for an ABS investment by a factor of four. JEL Classification: G01, G21, G24, G28

Suggested Citation

  • Matthias Efing, 2016. "Arbitraging the Basel securitization framework: Evidence from German ABS investment," ESRB Working Paper Series 22, European Systemic Risk Board.
  • Handle: RePEc:srk:srkwps:201622
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    File URL: https://www.esrb.europa.eu/pub/pdf/wp/esrbwp22.en.pdf
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    References listed on IDEAS

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    Cited by:

    1. Alogoskoufis, Spyros & Langfield, Sam, 2018. "Regulating the doom loop," ESRB Working Paper Series 74, European Systemic Risk Board.
    2. repec:eee:finsta:v:37:y:2018:i:c:p:49-59 is not listed on IDEAS
    3. repec:ofr:report:16-3 is not listed on IDEAS
    4. Andrea Mazzocchetti & Marco Raberto & Andrea Teglio & Silvano Cincotti, 2018. "Securitization and business cycle: an agent-based perspective," Industrial and Corporate Change, Oxford University Press, vol. 27(6), pages 1091-1121.
    5. John Ammer & Alexandra Tabova & Stijn Claessens, 2018. "Searching for Yield Abroad: Risk-Taking through Foreign Investment in U.S. Bonds," 2018 Meeting Papers 960, Society for Economic Dynamics.
    6. John Ammer & Alexandra Tabova & Caleb Wroblewski, 2018. "Searching for yield abroad: risk-taking through foreign investment in U.S. bonds," BIS Working Papers 687, Bank for International Settlements.
    7. repec:ces:ifodic:v:17:y:2019:i:1:p:50000000005874 is not listed on IDEAS

    More about this item

    Keywords

    regulatory arbitrage; asset-backed securities; reaching for yield; credit ratings;

    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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