Arbitraging the Basel Securitization Framework: Evidence from German Abs Investment

70 Pages Posted: 5 Nov 2020

See all articles by Matthias Efing

Matthias Efing

HEC Paris - Finance Department; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: September, 2016

Abstract

This paper provides evidence for regulatory arbitrage within the class of asset-backed securities (ABS) based on individual asset holding data of German banks. I find that banks operating with tight regulatory constraints exploit the low risk-sensitivity of rating-contingent capital requirements for ABS. Unlike unconstrained banks they systematically pick the securities with the highest yield and the lowest collateral performance among ABS with the same regulatory risk weight. This reaching for yield allows constrained banks to increase the return on the capital required for an ABS investment by a factor of four.

Keywords: regulatory arbitrage, asset-backed securities, reaching for yield, credit ratings

JEL Classification: G01, G21, G24, G28

Suggested Citation

Efing, Matthias, Arbitraging the Basel Securitization Framework: Evidence from German Abs Investment (September, 2016). ESRB: Working Paper Series (Topic) 201622, Available at SSRN: https://ssrn.com/abstract=3723367

Matthias Efing (Contact Author)

HEC Paris - Finance Department ( email )

France
(++33)695646755 (Phone)

HOME PAGE: http://matthiasefing.com/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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