Asset-backed Securities Market Research Articles

Crisis Liquidity Facilities with Nonbank Counterparties: Lessons from the Term Asset-Backed Securities Loan Facility

In response to immense strains in the asset-backed securities market in 2008 and 2020, the Federal Reserve and the U.S. Treasury twice launched the Term Asset-Backed Securities Loan Facility (TALF). TALF was an unusual crisis facility because it provided loans to a wide range of nonbank financial institutions. Using detailed loan-level data unexplored by previous researchers, we study the behavior of nonbank borrowers in TALF. We find the extent to which the actions of these borrowers supported key program goals--stabilizing markets quickly, winding down the program when it was no longer needed, providing liquidity to a wide range of assets, and having borrowers internalize credit risk rather than shift it to the government--were related to institutional differences across nonbanks. Since all TALF borrowers faced the same program terms and conditions, our study is able to highlight the role of these institutional constraints.

Better Be Careful: The Replenishment of ABS Backed by SME Loans

We investigate the replenishment of 102 asset-backed securities (ABS) backed by more than 1.7 million small- and medium-sized enterprise loans. Based on our extensive data set from 2012 to 2017 obtained from the first and only central loan-level repository for ABS in Europe, we reveal that loans added to securitized loan portfolios after the transactions' closing perform worse than loans that are part of the initial portfolio. On average, we find that loans added to securitized loan portfolios demonstrate a 0.42 percentage points higher probability of default. We additionally provide evidence that originators induce these performance differences since they exploit their information advantage by deliberately adding low-quality loans to securitized loan portfolios. This adverse behavior is mitigated by originators' reputation efforts, by increasing transparency in the ABS market, as for example per the European Central Bank's loan-level initiative, and most effectively by their interaction.

Better Be Careful: The Replenishment of ABS backed by SME Loans

We investigate the replenishment of 102 asset-backed securities (ABS) backed by more than 1.7 million small- and medium-sized enterprise loans. Based on our extensive data set from 2012 to 2017 obtained from the first and only loan-level central repository for ABS in Europe, we reveal that loans added to securitized loan portfolios after the transactions' closing perform worse than loans that are part of the initial portfolio. We additionally provide evidence that originators induce these performance differences since they exploit their information advantage by deliberately adding low-quality loans to securitized loan portfolios. This adverse behavior is mitigated by originators' reputation efforts, by increasing transparency in the ABS market, as for example per the European Central Bank's loan-level initiative, and most effectively by their interaction.

Common Structures of Asset-Backed Securities and Their Risks

In recent years, one area of growing concern in corporate governance is the accounting and transfer of risk using special purpose entities (or trusts). Such entities are used widely in issuing asset-backed securities. This paper provides an overview of the asset-backed securities market, and discusses the common structures used in this market to transform the risks associated with the underlying collateral into risks associated with the issued securities. Understanding these structures is essential to understanding the allocation and transfer of risk among the different parties in an asset-backed transaction – the originator, the special-purpose entity, investors, and related parties such as insurance guarantors. Understanding these structures is also essential in proposing potential solutions to regulatory and accounting concerns about the transfer of risks in asset-backed securities.

不動産証券投資をめぐるグローバルマネーフローと東京における不動産開発( グローバル化時代の大都市-東京(圏)に焦点をあてて-)

不動産証券投資をめぐるグローバルマネーフローと東京における不動産開発( グローバル化時代の大都市-東京(圏)に焦点をあてて-)

The Federal Reserve's Financial Crisis Response E: The Term Asset-Backed Securities Loan Facility

Securitization is a process that allows banks and other lenders to package loans and sell them as bonds called asset-backed securities (ABS), removing them from their balance sheets and immediately generating cash for new loans. ABS are an important component of the financing cycle for many types of loans to households and small businesses, including mortgages. In the fall of 2008, financial markets began experiencing disturbances as the effects of the U.S. subprime market meltdown spread. The ABS market froze decreasing the volume of new loans to households and small businesses. The Federal Reserve became very concerned about the potential for these circumstances to further weaken the U.S. economy and, as a result, implemented the Term Asset-backed Loan Facility (TALF) to jumpstart the market and mitigate the negative effects on the economy. In this case we discuss the design, usage of the TALF and its impact on the securitization markets during the crisis.

Trading dynamics in decentralized markets with adverse selection

We study a dynamic, decentralized lemons market with one-time entry and characterize its set of equilibria. Our framework offers a theory of how “frozen” markets suffering from adverse selection recover or “thaw” over time endogenously; given an initial fraction of lemons, our model delivers sharp predictions about the length of time it takes for the market to recover, and how prices and the composition of assets in the market behave over this horizon. We use our framework to analyze a form of government intervention introduced during the recent financial crisis in order to help unfreeze the market for asset-backed securities. We find that, depending on the fraction of lemons in the market, such an intervention can speed up or slow down market recovery. More generally, our analysis highlights that the success of an intervention in a lemons market depends on both its size and duration.

Insurance-Linked Securities and StructuredSettlements

Influence from direct capital markets’ participation in reinsurance programs, coupled with catastrophic insured losses well below historical averages in 2013, has put significant pressure on global catastrophic reinsurance pricing. There continues to be an increasing use and acceptance of indemnity-based triggers as the spread differential between that and other parametric and/or index-based triggers diminishes. Bespoke parametric structures for non-peak risks are becoming more common. The insurance-linked securities market is expanding in terms of both breadth of products and geography. Mortality risk remains a nascent market, but the extreme mortality segment is growing. Performance of the structured settlement asset-backed securities market has been stable, reflecting the stable performance of the life insurers whose annuities back the securitized pools. Despite isolated conduct episodes, the market has worked well. The court approval process has been relatively smooth. Moody’s assigns a rating of A3 or higher to 85% of the carriers whose annuity payments are the primary source of repayments under structured settlements. <b>TOPICS:</b>Asset-backed securities (ABS), legal and regulatory issues for structured finance

Auto Loan and Lease ABS Sector Review

This panel of ASF 2013 was held on Monday, January 28. Moderator Jeff O’Connor began with a reference to auto loan and lease asset-backed securities (ABS) as the “bright star of the universe” in a securitization market that has been cloudy for the past several years. Participants agreed with the moderator’s assessment and were universally pleased with the state of the auto ABS market and its near-term prospects for growth. Optimism was tempered somewhat by the reality that the level of growth and strong performance experienced post-crisis may not be sustainable on a long-term basis. Despite the strong market, a slight tension among the panelists was evident when the discussion turned to the return of prefunding or revolving structures and potential modifications to deal terms without investor consent after issuance.

Neoliberalism and the new international financial architecture

ABSTRACT This paper theorizes about the new international financial architecture as a manifestation of the ‘second face of neoliberalism’ – financial market reregulation through technocratic obfuscation and insularity from democratic political pressure. Using a more expansive definition of the new international financial architecture, one that includes the institutional nexus of international monetary management along with the rules and regulatory bodies governing capital, this argument is developed through an analysis of the origins and functions of two institutions comprising the new international financial architecture – the Basel Capital Accord and the diffusion of inflation targeting regimes across central banks. This paper excavates the neoliberal logic inscribed in these institutions and further shows how these new forms of institutional logic contributed to the financial crisis of 2008 by putting in place a set of opportunities and constraints that led to rapid growth in the market for asset-backed securities. The implications of this analysis for the future of regulatory reform are discussed, with particular attention paid to the question of what role central banks should play in this process.

The subprime asset-backed securities market and the equity prices of large complex financial institutions

In this paper, we investigate the relationship between the subprime asset-backed collateralized debt obligations (CDO) market and Large Complex Financial Institutions (LCFIs). We attempt to account for the dynamics between the ABX index returns and the banks’ equity returns through conditioning our analysis on the historical correlation between the variables. Three key results emerge from the analysis. First, we find a positive correlation between movements of the ABX index and the equity returns for all the LCFIs. Second, the volatility of ABX index returns tend to be transmitted to the volatilities of the equity returns of the financial institutions. Third, ABX prices changes lead equity returns changes of the European-based LCFIs. For the US LCFIs a two-way linkage emerges.

The Subprime Asset-Backed Securities Market and the Equity Prices of Large Complex Financial Institutions

In this paper, we investigate the linkage between the subprime asset-backed collateralized debt obligations (CDO) market and Large Complex Financial Institutions (LCFIs). We attempt to account for the dynamics between the ABX index returns and the banks’ equity returns through conditioning our analysis on the historical correlation between the variables. Three key results emerge from the analysis. First, we find a positive correlation between movements of the ABX index and the equity returns for all the LCFIs. Second, the volatility of ABX index returns tend to be transmitted to the volatilities of the equity returns of the financial institutions. Third, we find strong evidence of contagion effects to the European-based LCFIs. Overall, a two-way linkage emerge for the US LCFIs.

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The Subprime Asset-Backed Securities Market and the Equity Prices of Large Complex Financial Institutions

The Subprime Asset-Backed Securities Market and the Equity Prices of Large Complex Financial Institutions

Regulating Credit Rating Agencies after the Financial Crisis: The Long and Winding Road Toward Accountability

The credit crisis that started in the American mortgage subprime market in 2007 is having profound social and economic consequences. In this context, lawmakers, regulators, and commentators have questioned the role of rating agencies in the market turmoil. In light of the critiques, a strong consensus emerged that regulatory intervention was needed. The consensus was encapsulated in the Group of Twenty (G20) communique of April 2009 that stated that 'We have agreed on more effective oversight of the activities of Credit Rating Agencies, as they are essential market participants.' Thus, a number of reform initiatives are under way in Canada, Europe and the United States to address the concerns raised by credit rating agencies’ activities in the context of structured finance products. The paper provides a critical assessment of the regulatory initiatives put forward on both sides of the Atlantic to address the problems which have affected the accuracy of the ratings as well as the integrity of the ratings process. The first part of the paper offers some background relating to the subprime credit crisis. The second part moves to an analysis of the role of CRAs in the context of the structured finance products. Finally, after having highlighted the failings of CRAs’ in the asset-backed securities market, the paper presents the reform initiatives. It offers a critical comparative examination of the strategies for enhancing the accountability and effectiveness of CRAs.

The Financial Crisis of 2007–9 and the British Experience

Abstract.This paper traces the course of the international financial crisis from its outbreak in mid 2007 to the easing of financial turmoil in May 2009, based on the British experience. The crisis resulted from excessive risk‐taking following a prolonged period of macroeconomic stability, combined with financial innovation. Problems arose initially with rising defaults in the US market for subprime mortgages, which induced a breakdown in the market for asset backed securities in mid‐2007. The drying up of the money market threatened the liquidity of several UK banks, notably Northern Rock, while falling asset prices undermined their solvency. A critical point was reached when Lehman Brothers failed in September 2008. This event confirmed that the world faced a systemic financial crisis. Fortunately monetary and fiscal authorities took vigorous action to stem the crisis and as a result some confidence has been restored in ailing banks. This has not prevented a sharp decline in economic activity and a persistent shortage of credit.

An Investigation of Underwriting Fees for Asset-Backed Securities

This paper uses a proprietary database of asset-backed securities (ABS) to make two contributions to the literature: A detailed descriptive analysis of the ABS market and an investigation of the factors that influence underwriting fees in the ABS market. Using methodology similar to that used in Livingston and Miller (2000), evidence is provided that that the relation between underwriter prestige and underwriter fees is positive. Further, evidence is provided that the relation between underwriter fees and loyalty is positive, indicating that the more an issuer uses the same underwriter, the higher the fees that the issuer is charged.

Finance, Imperialism, and the Hegemony of the Dollar

The July-August 2007 crisis in subprime mortgage markets precipitated the collapse of the market for asset-backed securities, forcing huge write-downs of more than $45 billion on the balance sheets of major banks. In the aftershock, interbank lending dried up. Bond insurers and money market funds were beset by a loss of confidence as the credit squeeze spread. The plunge in stock markets in January 2008 suggests that the repercussions of the collapse of the subprime mortgage market are still working their way through financial markets. With over 170,000 jobs lost and the expected spate of foreclosures, many observers believe that the credit crunch has pushed the economy towards a recession.This article can also be found at the Monthly Review website, where most recent articles are published in full.Click here to purchase a PDF version of this article at the Monthly Review website.

Common structures of asset-backed securities and their risks

In recent years, one area of growing concern in corporate governance is the accounting and transfer of risk using special purpose entities (or trusts). Such entities are used widely in issuing asset-backed securities. This paper provides an overview of the asset-backed securities market, and discusses the common structures used in this market to transform the risks associated with the underlying collateral into risks associated with the issued securities. Understanding these structures is essential to understanding the allocation and transfer of risk among the different parties in an asset-backed transaction – the originator, the special-purpose entity, investors, and related parties such as insurance guarantors. Understanding these structures is also essential in proposing potential solutions to regulatory and accounting concerns about the transfer of risks in asset-backed securities

The ABCs of HELs

The home equity loan (HEL) sector has grown exponentially since 2002, to form the largest component of the asset-backed securities market. Their high liquidity and attractive spread pickup over the benchmark auto and credit card sectors increasingly make them a core holding for ABS investors. HEL bonds demand careful analysis because of an inherent mix of credit, prepayment, and structural risks. This overview of the HEL market evolution over the past decade provides some perspective on the risks and opportunities in the sector. It examines typical loan characteristics, underwriting trends, and the drivers of collateral performance, and discusses typical structural features of HEL ABS transactions and the key risk factors for ABS bondholders.