Securitization, Monetary Policy and Bank Stability

Abstract

We provide new evidence about the effect of securitization on bank stability and systemic risk in the run-up to and following the global financial crisis by considering the role of the bank lending channel of monetary policy. In so doing, we use a structural model of bank stability to construct a new measure of the net effect of securitization on bank stability. Analyzing the dynamics of this measure at the individual bank and the banking system levels shows that securitization activities have a destabilizing effect on banks, although this effect decreases after the crisis. To explain this change, we then use the bank lending channel as the main link between securitization and monetary policy. We find that low monetary policy interest rates in the aftermath of the global financial crisis have mitigated the destabilizing effect of securitization on banks.

Keywords: Securitization, Bank Profitability, Bank Risk, Bank Stability, Systemic Risk; Monetary Policy

JEL Classification: G21; G10