Reaching for Yield in the ABS Market: Evidence from German Bank Investments

57 Pages Posted: 25 Nov 2014 Last revised: 25 Jul 2019

See all articles by Matthias Efing

Matthias Efing

HEC Paris - Finance Department; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2019

Abstract

If regulation fails to differentiate between priced and idiosyncratic risk, it incentivizes investors to reach for yield. Studying securitization exposures on the balance sheets of German banks, I show evidence consistent with this prediction. Banks with tight regulatory constraints (low capital adequacy ratios) invest more in higher yielding ABSs conditionally on rating-implied regulatory risk weights. ABS investments of constrained banks tend to perform worse ex post in terms of collateral delinquency and lose value. Differences in bank sophistication, market power, or incentives to retain securitizations are unlikely to explain the riskier ABS investments of constrained banks.

Keywords: Reaching for yield, asset-backed securities, financial regulation, credit ratings

JEL Classification: G01, G21, G24, G28

Suggested Citation

Efing, Matthias, Reaching for Yield in the ABS Market: Evidence from German Bank Investments (July 15, 2019). Swiss Finance Institute Research Paper No. 14-65. Available at SSRN: https://ssrn.com/abstract=2527981 or http://dx.doi.org/10.2139/ssrn.2527981

Matthias Efing (Contact Author)

HEC Paris - Finance Department ( email )

France
(++33)695646755 (Phone)

HOME PAGE: http://matthiasefing.com/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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