Sponsor Risk and the Performance of Asset-Backed Securities

44 Pages Posted: 25 Aug 2011

See all articles by Christopher J. Mayer

Christopher J. Mayer

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Kathleen Johnson

Board of Governors of the Federal Reserve - Division of Research and Statistics

Oliver Faltin-Traeger

Columbia University - Columbia Business School

Abstract

Asset-backed securitization transforms assets into securities and in the process separates the credit risk of a pool of assets from the credit risk of the securitization’s sponsor, which gives securitization several important advantages over issuing corporate debt. Recent research, however, suggests a link between the financial condition of the sponsor and the performance of its ABS. If market participants do not fully understand the link between the sponsor’s financial condition and the future performance of its ABS, rating agencies may improperly rate these securities, investors may improperly price the risk of these securities, and regulators may require inadequate capital against potential losses in these securities. The results presented in this paper suggest a strong link between the financial condition of the sponsor and the subsequent performance of the securitization. Securities sponsored by a higher-rated sponsor retain their initial rating longer before being downgraded than securities sponsored by a lower-rated sponsor. Securities sponsored by better capitalized, more diversified, or vertically integrated firms also perform better. Finally, securities sponsored by banks tend to be downgraded later than ABS sponsored by foreign banks or by nonbanks. Importantly, we find many of these relationships existed in ABS issued well before the financial crisis.

Suggested Citation

Mayer, Christopher J. and Johnson, Kathleen and Faltin-Traeger, Oliver, Sponsor Risk and the Performance of Asset-Backed Securities. Columbia Business School Research Paper No. 11-6. Available at SSRN: https://ssrn.com/abstract=1916311 or http://dx.doi.org/10.2139/ssrn.1916311

Christopher J. Mayer (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kathleen Johnson

Board of Governors of the Federal Reserve - Division of Research and Statistics ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Oliver Faltin-Traeger

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
247
Abstract Views
1,443
rank
123,765
PlumX Metrics