Securitization, Risk Transferring and Financial Instability: The Case of Spain

Abstract

Spain is particularly illustrative of the 2007-2010 financial crisis as it exemplifies in a vivid manner most of its core causes. This country experienced a pronounced housing bubble partly funded via spectacular expansion on its securitization markets leading to looser credit standards and subsequent financial stability problems. We analyze the sequential deterioration of credit quality in Spain considering rating changes in securitized deals. Using a sample of 20,286 observations from 2000Q1 to 2010Q1, we build a model at the instrument level in which the loan growth, on balance-sheet credit quality and rating changes are estimated simultaneously. Our results suggest that loan growth significantly affects loan performance with a lag of at least two years. Additionally, loan performance is found to explain rating changes with a lag of four quarters. Although securitized products are supposed to ensure remoteness from their originating bank, we also find that bank characteristics (in particular, observed solvency, cash flow generation and cost efficiency) affect ratings considerably. The impact of bank characteristics on rating changes is far stronger for securities issued by savings banks as compared with commercial banks.

Keywords: securitization, lending, risk, financial instability

JEL Classification: G21, G12