Reaching for Yield in the ABS Market: Evidence from German Bank Investments
57 Pages Posted: 25 Nov 2014 Last revised: 25 Jul 2019
Date Written: July 15, 2019
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: Suggested Citation