Does Securitization Reduce Credit Risk Taking? Empirical Evidence from US Bank Holding Companies

Posted: 6 Feb 2010

See all articles by Barbara Casu

Barbara Casu

City University London - Sir John Cass Business School

Andrew Clare

City University London - Sir John Cass Business School

Anna Sarkisyan

University of Essex - Essex Business School

Steve Thomas

City University London - Sir John Cass Business School

Date Written: February 5, 2010

Abstract

This study investigates the impact of securitization on the credit-risk taking behavior of banks. Using US bank holding company data from 2001 to 2007 we find that banks with a greater balance of outstanding securitized assets choose asset portfolios of lower credit risk. Examining securitizations by the type of underlying assets we find that the negative relationship between outstanding securitization and risk taking is primarily driven by securitizations of mortgages and home equity lines of credit. Securitizations of all other types of assets, on the other hand, seem to have no significant impact on bank credit-risk taking behavior. We attribute these results to the recourse commonly provided in securitization transactions that might alter the risk-taking appetite of the issuing banks across asset classes. Therefore, we conclude that the net impact of securitization on the risk-taking behavior of issuing banks, and consequently on the soundness of the banking system, is ambiguous and will depend on the transactions structure. In particular, it will depend on the relative magnitude of credit support provided by banks. This leads us to suggest that banks have typically viewed securitization as a financing rather than a risk management mechanism.

Keywords: bank, securitization, risk taking

JEL Classification: G21, G32

Suggested Citation

Casu, Barbara and Clare, Andrew D. and Sarkisyan, Anna and Thomas, Stephen H., Does Securitization Reduce Credit Risk Taking? Empirical Evidence from US Bank Holding Companies (February 5, 2010). Available at SSRN: https://ssrn.com/abstract=1548361

Barbara Casu

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Andrew D. Clare

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Anna Sarkisyan (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

HOME PAGE: http://www.essex.ac.uk/ebs/staff/profile.aspx?ID=2004

Stephen H. Thomas

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 5271 (Phone)
+44 (0) 20 7040 8881 (Fax)

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