Abstract

http://ssrn.com/abstract=1894734
 
 

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Why Did U.S. Banks Invest in Highly-Rated Securitization Tranches?


Isil Erel


Ohio State University (OSU) - Department of Finance

Taylor Nadauld


Brigham Young University

Rene M. Stulz


Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

July 25, 2011

Fisher College of Business Working Paper Paper No. 2011-03-016
Charles A. Dice Center Working Paper No. 2011-16
ECGI - Finance Working Paper No. 313/2011

Abstract:     
We estimate holdings of highly-rated tranches of mortgage securitizations of American deposit-taking banks ahead of the credit crisis and evaluate hypotheses that have been advanced to explain these holdings. We find that holdings of highly-rated tranches were economically trivial for the typical bank, but banks with greater holdings performed more poorly during the crisis. Though univariate comparisons show that banks with large trading books had greater holdings, the holdings of highly-rated tranches are not higher for banks with large trading books in regressions that control for bank size. The ratio of highly-rated tranches holdings to assets increases with bank assets, but not for banks with more than $50 billion of assets. This evidence is inconsistent with explanations for holdings of highly-rated tranches that emphasize the incentives of banks deemed “too-big-to-fail”. Further, the evidence does not provide support for “bad incentives” or “bad risk management” theories of holdings of highly-rated tranches. We find, however, that banks active in securitization held more highly-rated tranches. Such a result can be consistent with regulatory arbitrage as well as with securitizing banks holding highly-rated tranches to convince investors of the quality of these securities. Our evidence is more supportive of the latter hypothesis.

Number of Pages in PDF File: 62

JEL Classification: G01, G21

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Date posted: July 25, 2011 ; Last revised: March 11, 2014

Suggested Citation

Erel, Isil and Nadauld, Taylor and Stulz, Rene M., Why Did U.S. Banks Invest in Highly-Rated Securitization Tranches? (July 25, 2011). Fisher College of Business Working Paper Paper No. 2011-03-016; Charles A. Dice Center Working Paper No. 2011-16; ECGI - Finance Working Paper No. 313/2011. Available at SSRN: http://ssrn.com/abstract=1894734 or http://dx.doi.org/10.2139/ssrn.1894734

Contact Information

Isil Erel
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States

Taylor Nadauld
Brigham Young University ( email )
Provo, UT 84602
United States
Rene M. Stulz (Contact Author)
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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