Foreign Exposure to Asset-Backed Securities of U.S. Origin

FRB International Finance Discussion Paper No. 939

33 Pages Posted: 1 Nov 2008

See all articles by Daniel O. Beltran

Daniel O. Beltran

Federal Reserve Board

Laurie Pounder

Federal Reserve Board

Charles P. Thomas

Thomas & Son Analytics

Date Written: August 1, 2008

Abstract

The financial turmoil which began in August 2007 originated, in part, because investors reassessed the quality of the assets underlying many asset-backed securities (ABS), particularly U.S. mortgages. The prominence of European banks in the early stages of the turmoil created the perception that foreigners held an outsized share of risky U.S. securities and prompted questions of why Europeans were so exposed. This paper evaluates that perception by quantifying foreign exposure to ABS with U.S. underlying collateral. Using the latest survey data on foreign portfolio holdings of U.S. securities, we find that the ultimate losses that foreigners could incur arising from U.S. underlying assets are small relative to most scale variables, although initial total mark-to-market losses are estimated to be significantly larger. Among other reasons for this difference between ultimate and initial losses, we demonstrate that the securitization chain can amplify mark-to-market price declines in the presence of uncertainty or illiquidity. Finally, we show that, relative to the size of the market, foreigners' holdings of U.S. mortgage-backed securities do not appear to be elevated compared with their holdings of other U.S. assets.

Keywords: Financial turmoil, securitization, ABS, mark-to-market

JEL Classification: G15, G20

Suggested Citation

Beltran, Daniel O. and Pounder, Laurie and Thomas, Charles P., Foreign Exposure to Asset-Backed Securities of U.S. Origin (August 1, 2008). FRB International Finance Discussion Paper No. 939. Available at SSRN: https://ssrn.com/abstract=1292406 or http://dx.doi.org/10.2139/ssrn.1292406

Daniel O. Beltran

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Laurie Pounder

Federal Reserve Board

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Charles P. Thomas (Contact Author)

Thomas & Son Analytics ( email )

5409 Center St
Chevy Chase, MD 20815
United States
2022075834 (Phone)

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