The Recourse Rule, Regulatory Arbitrage, and the Financial Crisis
39 Pages Posted: 4 Aug 2017 Last revised: 17 Mar 2018
Date Written: March 13, 2018
In November 2001, regulators finalized the so-called Recourse Rule, which lowered risk weights, and therefore holding company capital requirements, to 0.2 (0.5) for AAA- and AA-rated (A-rated) private-label securitization tranches. Regulators indicated the rule would apply to larger institutions. Estimated quarterly treatment effects indicate that larger holding companies with at least $50 billion in assets increased their holdings of the highly rated tranches, relative to total assets and book equity capital, while smaller holding companies, on average, did not. Holding companies with greater holdings of private-label securitizations also experienced greater declines in distance-to-default after Q1 2008, but not before then.
Keywords: asset-backed securities, difference-in-difference, financial crisis, regulatory capital requirements, unintended consequences
JEL Classification: E02, F33, G01, G18, G28
Suggested Citation: Suggested Citation