Does Credit Securitization Reduce Bank Risk? Evidence from the European CDO Market

21 Pages Posted: 2 Mar 2007

See all articles by Dennis Haensel

Dennis Haensel

Goethe University Frankfurt - Department of Finance

Jan Pieter Krahnen

Goethe University Frankfurt

Date Written: January 29, 2007

Abstract

In this paper we analyze whether the use of credit risk transfer instruments affects the risk taking by large, international banks. Relying on a unique data set of European collateralized debt obligations (CDOs), we find that the issue of CDOs tends to raise the systematic risk (equity beta) of the issuing bank. We also perform a cross-sectional analysis to identify determinants of the change in systematic risk, and find that equity beta rises significantly more if the issuing bank is financially weak (low profitability and high leverage), and if it is domiciled in a bank-based financial system. Overall, our findings suggest that credit securitization goes hand in hand with an increase in the risk appetite of the issuing bank. Our findings are also relevant for understanding the financial stability implications of credit securitizations.

Keywords: risk transfer, systemic risk, event study, bank risk, securitization

JEL Classification: G28, G21

Suggested Citation

Haensel, Dennis and Krahnen, Jan Pieter, Does Credit Securitization Reduce Bank Risk? Evidence from the European CDO Market (January 29, 2007). Available at SSRN: https://ssrn.com/abstract=967430 or http://dx.doi.org/10.2139/ssrn.967430

Dennis Haensel (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

Mertonstr. 17
Frankfurt, 60325
Germany
+49 69 798 28429 (Phone)
+49 69 798 28951 (Fax)

Jan Pieter Krahnen

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3,184
Abstract Views
13,455
rank
4,683
PlumX Metrics