Risk Allocation Through Securitization – Evidence From Non-Performing Loans

1 Pages Posted: 30 Jul 2018 Last revised: 11 Apr 2021

See all articles by Sascha Tobias Wengerek

Sascha Tobias Wengerek

Paderborn University - Faculty of Business Administration and Economics - Department of Taxation, Accounting & Finance

Benjamin Hippert

BaFin- Federal Financial Supervisory Authority

André Uhde

University of Paderborn - Faculty of Business Administration and Economics - Department of Taxation, Accounting & Finance

Date Written: September 7, 2019

Abstract

Employing a unique and hand-collected sample of 648 true sale loan securitization transactions issued by 57 stock-listed banks across the EU-12 plus Switzerland over the period from 1997 to 2010, this paper empirically analyzes the relationship between true sale loan securitization and the issuing banks’ non-performing loans to total assets ratios (NPLRs). We provide evidence for an NPLR-reducing effect during the boom phase of securitizations in Europe suggesting that banks in our sample (partly) securitized NPLs as the most risky junior tranche and did not (fully) retain NPLs as a reputation and quality signal towards less informed investors in imperfect capital markets. In contrast, we find the reverse effect during the crises period in Europe indicating that issuing banks provided credit enhancement and demonstrated `skin in the game'. Our baseline result remains robust when controlling for endogeneity concerns and a potential persistence in the time series of the NPL data. Moreover, results from a variety of sensitivity analysis reveal that the NPLR-reducing effect is stronger for opaque securitization transactions, for issuing banks exhibiting higher average levels of NPLRs and for banks operating from non-PIIGS countries. In addition, a reduction of NPLRs through securitization is observed for issued collateralized debt obligations, residential mortgage-backed securities, consumer and other unspecified loans as well as for non-frequently issuing, systemically less important and worse-rated banks. Our analysis offers essential insights into the loan risk allocation process through securitization and provides important implications for the vital debate on reducing NPL exposures and the process of revitalizing and regulating the European securitization market.

Keywords: European Banking, Non-performing Loans, Risk Allocation, Securitization

JEL Classification: G21, G28, G32

Suggested Citation

Wengerek, Sascha Tobias and Hippert, Benjamin and Uhde, André, Risk Allocation Through Securitization – Evidence From Non-Performing Loans (September 7, 2019). Available at SSRN: https://ssrn.com/abstract=3221075 or http://dx.doi.org/10.2139/ssrn.3221075

Sascha Tobias Wengerek (Contact Author)

Paderborn University - Faculty of Business Administration and Economics - Department of Taxation, Accounting & Finance ( email )

Warburger Str. 100
Paderborn, D-33098
Germany

HOME PAGE: http://www.upb.de/finance

Benjamin Hippert

BaFin- Federal Financial Supervisory Authority ( email )

Graurheindorfer Str. 108
Bonn, 53117
Germany

André Uhde

University of Paderborn - Faculty of Business Administration and Economics - Department of Taxation, Accounting & Finance ( email )

Warburger Str. 100
D-33098 Paderborn
Germany

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