Why Did Holdings of Highly Rated Securitization Tranches Differ So Much Across Banks?
Charles A. Dice Center Working Paper No. 2012-27
Fisher College of Business Working Paper Paper No. 2012-03-027
71 Pages Posted: 25 Jul 2011 Last revised: 7 Feb 2015
There are 2 versions of this paper
Why Did Holdings of Highly Rated Securitization Tranches Differ So Much Across Banks?
Why Did U.S. Banks Invest in Highly-Rated Securitization Tranches?
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: Suggested Citation
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