Why Did Holdings of Highly Rated Securitization Tranches Differ So Much Across Banks?
Ohio State University (OSU) - Department of Finance
Brigham Young University
René M. Stulz
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
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
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.
Number of Pages in PDF File: 71
Keywords: financial crisis, too-big-to-fail, securitization, credit crisis, regulatory arbitrage
JEL Classification: G01, G21
Date posted: July 25, 2011 ; Last revised: February 7, 2015