Arbitraging the Basel Securitization Framework: Evidence from German ABS Investment

70 Pages Posted: 25 Nov 2014 Last revised: 12 Sep 2018

See all articles by Matthias Efing

Matthias Efing

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

Multiple version iconThere are 2 versions of this paper

Date Written: September 12, 2018

Abstract

This paper provides evidence for regulatory arbitrage within the class of asset-backed securities (ABS) based on individual asset holding data of German banks. I find that banks operating with tight regulatory constraints exploit a non-monotonic relation between yield spreads and rating-contingent capital requirements for ABS. Unlike unconstrained banks, they systematically pick the securities with the highest yield spreads and the lowest ex post performance while keeping constant or even decreasing capital requirements. This regulatory arbitrage allows constrained banks to increase the ratio of yield spread to required capital by a factor of four. Differences in sophistication, market power, or incentives to retain securitizations are unlikely to explain the riskier ABS investments of constrained banks.

Keywords: Regulatory arbitrage, asset-backed securities, risk-taking, ratings inflation

JEL Classification: G01, G21, G24, G28

Suggested Citation

Efing, Matthias, Arbitraging the Basel Securitization Framework: Evidence from German ABS Investment (September 12, 2018). 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/

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

Poschinger Str. 5
Munich, DE-81679
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
436
rank
56,679
Abstract Views
2,200
PlumX Metrics