Asset Portfolio Securitizations and Cyclicality of Regulatory Capital

33 Pages Posted: 18 Nov 2015

See all articles by Kristina Lützenkirchen

Kristina Lützenkirchen

Leibniz University of Hannover

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Date Written: 2014

Abstract

This paper analyzes the level and cyclicality of regulatory bank capital for asset portfolio securitizations in relation to the cyclicality of capital requirements for the underlying loan portfolio as under Basel II/III. We find that the cyclicality of capital requirements is higher for (i) asset portfolio securitizations relative to primary loan portfolios, (ii) Ratings Based Approach (RBA) relative to the Supervisory Formula Approach, (iii) given the RBA for a point-in-time rating methodology relative to a rate-and-forget rating methodology, and (iv) under the passive reinvestment rule relative to alternative rules. Capital requirements of the individual tranches reveal that the volatility of aggregated capital charges for the securitized portfolio is triggered by the most senior tranches. This is due to the fact that senior tranches are more sensitive to the macroeconomy. An empirical analysis provides evidence that current credit ratings are time-constant and that economic losses for securitizations have exceeded the required capital in the recent financial crisis.

Keywords: Asset-backed security, Economic downturn, Impairment, Regulation, Regulatory capital, Mortgage-backed security

JEL Classification: G20, G28, C51

Suggested Citation

Lützenkirchen, Kristina and Roesch, Daniel and Scheule, Harald, Asset Portfolio Securitizations and Cyclicality of Regulatory Capital (2014). European Journal of Operational Research, 237, 2014, 289-302, Available at SSRN: https://ssrn.com/abstract=2690783

Kristina Lützenkirchen

Leibniz University of Hannover ( email )

Institut fur Rechnungslegung und WP
Koenigsworther Platz 1
Hannover, 30167
Germany

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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