Why Do UK Banks Securitize?

36 Pages Posted: 6 May 2012

See all articles by Mario Cerrato

Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

Moorad Choudhry

University of Kent Business School; London Metropolitan University

John Crosby

University of Technology Sydney Business School

John L. Olukuru

affiliation not provided to SSRN

Date Written: April 26, 2012

Abstract

The eight years from 2000 to 2008 saw a rapid growth in the use of securitization by UK banks. We aim to identify the reasons that contributed to this rapid growth. The time period (2000 to 2010) covered by our study is noteworthy as it covers the pre-financial crisis credit-boom, the peak of the financial crisis and its aftermath. In the wake of the financial crisis, many governments, regulators and political commentators have pointed an accusing finger at the securitization market - even in the absence of a detailed statistical and economic analysis. We contribute to the extant literature by performing such an analysis on UK banks, focussing principally on whether it is the need for liquidity (i.e. the funding of their balance sheets), or the desire to engage in regulatory capital arbitrage or the need for credit risk transfer that has led to UK banks securitizing their assets.

We show that securitization has been significantly driven by liquidity reasons. In addition, we observe a positive link between securitization and banks' credit risk. We interpret these latter findings as evidence that UK banks which engaged in securitization did so, in part, to transfer credit risk and that, in comparison to UK banks which did not use securitization, they had more credit risk to transfer in the sense that they originated lower quality loans and held lower quality assets. We show that banks which issued more asset-backed securities before the financial crisis suffered more defaults after the financial crisis.

JEL Classification: G21, G28

Suggested Citation

Cerrato, Mario and Choudhry, Moorad and Crosby, John and Olukuru, John L., Why Do UK Banks Securitize? (April 26, 2012). Available at SSRN: https://ssrn.com/abstract=2051379 or http://dx.doi.org/10.2139/ssrn.2051379

Mario Cerrato (Contact Author)

London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )

Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom

Moorad Choudhry

University of Kent Business School ( email )

Canterbury, Kent CT2 7PE
United Kingdom

London Metropolitan University ( email )

166-220 Holloway Road
London EC3N 2EY, N7 8HN
United Kingdom

John Crosby

University of Technology Sydney Business School ( email )

Sydney
Australia

John L. Olukuru

affiliation not provided to SSRN ( email )

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