Has the Risk Relevance of Securitization Changed in the Post-Crisis Period?
Posted: 23 Apr 2016
Date Written: April 21, 2016
This study investigates the association between two measures of bank insolvency risk, the accounting-based z-score and the market-based Merton’s distance to default, and asset securitization as the financial crisis approached, unfolded, and in its aftermath. We consider both the risks arising from the exposure associated with off-balance sheet securitized assets and those deriving from retained interest, over the period 2001-2014. This allows us to investigate the temporal and cross-sectional variation in the risk relevance of securitization, overall and across major securitized asset classes (asset-backed and mortgage-backed securitization). We find that both measures of insolvency risk reflect the temporal and cross-sectional variation in the riskiness of securitized assets, although to a different extent, with the Merton’s distance to default reflecting the riskiness of outstanding mortgage securitization and related retained interest during the crisis period. We also find evidence of greater transparency of securitization risk exposure in the post-crisis period.
Keywords: Securitization, retained interest, insolvency risk, banks
JEL Classification: G21, G32
Suggested Citation: Suggested Citation