Regulation, CDO Exposures, and Debt Guarantees through the Financial Crisis
31 Pages Posted: 7 Feb 2023
Date Written: January 2023
Abstract
Collateralized debt obligations with asset backed securities as collateral (ABS CDOs) often get
overshadowed in debates over causes of large commercial bank holding company (BHC) distress
during the 2007–2009 crisis. For BHCs, the Recourse Rule made holding the highest rated ABS CDO tranches more favorable by lowering required capital. Large BHCs that commented on preliminary Recourse Rule proposals or issued CDOs had higher average estimated debt guarantees after Q2 2008, reaching a peak of nearly $3.49 billion or $6.73 billion, respectively. From Q2 2008 to Q1 2009, among trading assets, only CDO holdings have a large positive association with higher estimated debt guarantees for BHCs.
Keywords: bank capital requirements, collateralized debt obligations, debt guarantees, too-big-to-fail subsidies
JEL Classification: D78, G01, G18, G21, G28, H81
Suggested Citation: Suggested Citation