Simple is Simply not Enough – Features versus Labels of Complex Financial Securities

Abstract

Based on a unique data set of European residential mortgage-backed security (RMBS) deals with 31 million quarterly loan observations, we examine how design features and labels of complex financial securities affect tranches’ spreads and loan performance. Exploiting the features required by the European Union’s Securitization Regulation and the STS (Simple, Transparent, Standardized) label, we find that the features of the security design and not the label are crucial for the loan performance. However, investors hardly consider the features but simply rely on the existence of the label.

Keywords: asset-backed securities, EU securitization regulation, simple transparent standardized (STS), loan performance, complex securities

JEL Classification: D82, G01, G18, G21