Abstract
In this paper, we examine whether the relation between securitization and bank risk changes after the financial crisis of 2007 to 2009. Using different measures of risk, we find that prior to 2007, securitization increases bank risk. We find no evidence that securitization increases bank risk after 2009. Our findings are robust to different characterizations of securitization, the time periods used to measure the changes in bank risk, as well as to different estimation approaches. Our findings suggest that the economic losses that the banks suffered during the financial crisis and the new rules put in place in its aftermath have diminished the incentives for banks to engage in risk taking via securitization.
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Notes
See Acharya et al. (2013) for an example of the lack of risk transfer associated with conduits for asset-backed commercial paper.
We use the term bank to refer to a bank holding company (BHC) in the remainder of the paper
Basel I regulations require a bank to maintain a Tier 1 capital ratio of 4 %. Our results do not materially change if we include banks with a Tier 1 capital ratio less than 4 %.
We also estimate our models with bootstrapped standard errors. Our results remain qualitatively unchanged.
Our results still hold when we classify the banks based on a higher securitization frequency.
The complete conversion scale is as follows: AAA = 1, AA + = 2, AA = 3, AA- = 4, A + = 5, A = 6, A- = 7, BBB + = 8, BBB = 9, BBB- = 10, BB + = 11, BB = 12, BB- = 13, B + = 14, B = 15, B- = 16, CCC = 17, CC = 18, C or D = 19
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Acknowledgments
We would like to thank an anonymous referee, Danh Vinh Le, seminar participants at Louisiana State University, and conference participants at the 2011 Financial Management Association and 2012 Southwestern Finance Association Annual Meetings for helpful suggestions and comments. All remaining errors are our own.
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The authors declare that they have no conflict of interest.
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Le, H.T.T., Narayanan, R.P. & Van Vo, L. Has the Effect of Asset Securitization on Bank Risk Taking Behavior Changed?. J Financ Serv Res 49, 39–64 (2016). https://doi.org/10.1007/s10693-015-0214-1
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DOI: https://doi.org/10.1007/s10693-015-0214-1