Does Credit Securitization Reduce Bank Risk? Evidence from the European CDO Market

21 Pages Posted: 2 Mar 2007  

Dennis Haensel

Goethe University Frankfurt - Finance Department

Jan Pieter Krahnen

Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Center for Financial Studies (CFS); Centre for Economic Policy Research (CEPR)

Date Written: January 29, 2007

Abstract

In this paper we analyze whether the use of credit risk transfer instruments affects the risk taking by large, international banks. Relying on a unique data set of European collateralized debt obligations (CDOs), we find that the issue of CDOs tends to raise the systematic risk (equity beta) of the issuing bank. We also perform a cross-sectional analysis to identify determinants of the change in systematic risk, and find that equity beta rises significantly more if the issuing bank is financially weak (low profitability and high leverage), and if it is domiciled in a bank-based financial system. Overall, our findings suggest that credit securitization goes hand in hand with an increase in the risk appetite of the issuing bank. Our findings are also relevant for understanding the financial stability implications of credit securitizations.

Keywords: risk transfer, systemic risk, event study, bank risk, securitization

JEL Classification: G28, G21

Suggested Citation

Haensel, Dennis and Krahnen, Jan Pieter, Does Credit Securitization Reduce Bank Risk? Evidence from the European CDO Market (January 29, 2007). Available at SSRN: https://ssrn.com/abstract=967430 or http://dx.doi.org/10.2139/ssrn.967430

Dennis Haensel (Contact Author)

Goethe University Frankfurt - Finance Department ( email )

Mertonstr. 17
Frankfurt, 60325
Germany
+49 69 798 28429 (Phone)
+49 69 798 28951 (Fax)

Jan Pieter Krahnen

Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 33699 (Phone)
+49 69 798 33901 (Fax)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 30080 (Phone)
+49 69 798 30077 (Fax)

Center for Financial Studies (CFS) ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 30050 (Phone)
+49 69 798 30077 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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