Final Demand for Structured Finance Securities

Abstract

Structured finance boomed during the run-up to the Financial Crisis. Existing explanations for this growth emphasize supply-side factors. Demand, however, was also encouraged by efforts to avoid regulatory capital requirements. We show that life insurance companies exposed to unrealized losses from low interest rates in the early 2000s increased their holdings of highly rated securitized assets, assets which offered the highest yield per unit of required capital. The results are only evident in accounts subject to capital requirements and at firms with low levels of ex ante capital, consistent with regulation creating distortionary incentives fueling the demand for securitized assets.

Keywords: Demand, RMBS, Capital Requirements

JEL Classification: G01, G18, G21, G22, G23