Characteristics of Securitizations that Determine Issuers' Retention of the Risks of the Securitized Assets

63 Pages Posted: 23 May 2007 Last revised: 26 Dec 2007

See all articles by Weitzu Chen

Weitzu Chen

Soochow University

Chi-Chun Liu

National Chengchi University

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 2007

Abstract

We hypothesize and provide evidence that certain general characteristics of banks' loan securitizations accounted for as sales determine the extent to which banks retain the risks of the securitized loans. We show that banks retain more risk when: (1) the types of loans have higher and/or less externally verifiable credit risk (specifically, commercial loans more than consumer loans more than mortgages), so banks must retain larger contractual or noncontractual first-loss interests in the loans; (2) the loans are closed-ended and banks retain larger contractual interests in the loans; and (3) the loans are closed-ended and banks retain types of contractual interests that more strongly concentrate the risk of the securitized loans (specifically, credit-enhancing interest-only strips more than other subordinated asset-backed securities). We also show that the magnitude and type of retained contractual interests are not risk-relevant in revolving loan securitizations, because banks have more incentive and ability to provide implicit recourse, a noncontractual interest. We infer that banks retain more of the risk of their securitized loans when their total equity risk as measured by future stock return volatility is more positively associated with the off-balance sheet securitized loans and the on-balance sheet contractual retained interests in those loans, all else being equal.

Keywords: Securitizations, loans, banks, risk, retained interests, implicit recourse

JEL Classification: G21, G32, M41

Suggested Citation

Chen, Weitzu and Liu, Chi-Chun and Ryan, Stephen G., Characteristics of Securitizations that Determine Issuers' Retention of the Risks of the Securitized Assets (December 2007). Available at SSRN: https://ssrn.com/abstract=1077798 or http://dx.doi.org/10.2139/ssrn.1077798

Weitzu Chen

Soochow University ( email )

No. 1 Shizi Street
Taipei, Jiangsu 215006
Taiwan

Chi-Chun Liu

National Chengchi University

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

Stephen G. Ryan (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

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