Why Did Holdings of Highly Rated Securitization Tranches Differ So Much Across Banks?

71 Pages Posted: 25 Jul 2011 Last revised: 7 Feb 2015

Isil Erel

Ohio State University (OSU) - Department of Finance

Taylor Nadauld

Brigham Young University

René M. Stulz

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 4, 2015

Abstract

We provide estimates of holdings of highly rated securitization tranches of U.S. bank holding companies before the credit crisis and evaluate hypotheses that have been advanced to explain them. Whereas holdings exceeded Tier 1 capital for some large banks, they were economically trivial for the typical bank. Banks with high holdings were not riskier before the crisis using conventional measures, but they performed poorly during the crisis. We find that holdings of highly rated tranches were correlated with a bank’s securitization activity. Theories unrelated to the securitization activity, such as “bad incentives” or “bad risk management,” are not supported in the data.

Keywords: financial crisis, too-big-to-fail, securitization, credit crisis, regulatory arbitrage

JEL Classification: G01, G21

Suggested Citation

Erel, Isil and Nadauld, Taylor and Stulz, René M., Why Did Holdings of Highly Rated Securitization Tranches Differ So Much Across Banks? (February 4, 2015). Charles A. Dice Center Working Paper No. 2012-27; Fisher College of Business Working Paper Paper No. 2012-03-027; ECGI - Finance Working Paper No. 313/2011. Available at SSRN: https://ssrn.com/abstract=1894734 or http://dx.doi.org/10.2139/ssrn.1894734

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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