Securitization Activity Research Articles

Securitization and Bank Performance

Theory suggests that securitization provides financial institutions with an opportunity to lower the cost of funding; improve credit risk management and increase profitability. In practice, as evidence during the recent crisis, it might lead to adverse consequences through a number of indirect channels. Therefore, the net impact of securitization on bank performance is ambiguous. This study aims to evaluate whether banks improve their performance through the use of securitization markets by applying a propensity score matching approach. In other words, we build a counterfactual group of banks to assess what would have happened to the securitizing banks had they not securitized. Using US commercial banking data from 2001 to 2008, univariate analysis indicates that securitizing banks are, on average, more profitable institutions, with higher credit risk exposure and higher cost of funding. However, the propensity score matching analysis does not provide evidence of significant causal effects of securitization on the performance of banks. Therefore, securitization does not seem to outperform alternative funding, risk management and profitability improvement techniques. Our evidence raises important questions about banks motives for increasing securitization activities and consequent implications for banking systems.

Why Do Banks Securitize? The Case of Italy

This paper explores the motivations underlying the securitization activities of Italian banks from 1999 to 2006. The hypotheses under investigation are those of funding, specialization and regulatory capital arbitrage. To test which of the incentives suggested by these hypotheses are statistically significant securitization's determinants, we estimate a probit model, in which the probability of carrying out securitizations is linked to a set of balance sheet indicators and a vector of further control variables. Consistently with the funding hypothesis, the main conclusion of the research is that Italian banks seem to securitize in order to diversify/optimize the available funding channels. Besides, the status of the bank on the stock exchange positively affects the decision of securitizing, presumably because of the market knowledge effect. By contrast, the motivations related to the other two hypotheses do not appear to be relevant. Finally, also bank's size tends to increase the propensity to securitize, supporting the argument that bigger banks are better able to bear the high structuring costs associated to securitization.

Does Islamic banks' securitization involvement restrain their financing activity?

Purpose – The purpose of this paper is to validate the concern that banks' increasing involvement in securitization activity restrains banks' lending, as well as their degree of risk tolerance. Theoretical frameworks claim that securitization reduces risk, hence decreasing banks' degree of risk aversion. Subsequently, banks would be motivated to increase their percentage of assets devoted to risky activities, which is lending to economic sectors. However, banking statistics dictates that banks' lending is on the decline while banks' securitization activities are on the rise.Design/methodology/approach – The paper refers specifically to the Malaysian Islamic commercial banks and utilizes standard panel data analysis.Findings – Supportive evidence was found that banks' involvement in securitization activity do restrain their lending activity. In addition, banks tend to have a riskier portfolio composition following their involvement in securitization activity. Taken together, this signals that banks' involv...

The Impacts of Securitization on US Bank Holding Companies

We use data from 2001-2007 to assess the impact of mortgage and other forms of asset securitization on the insolvency risk, profitability, and leverage ratios of US bank holding companies. Using 3 different estimation techniques, we find that banks use mortgage securitization to reduce insolvency risk and increase leverage. We also find that securitization techniques increase bank profitability. Our results suggest that securitization techniques have played a positive role. This suggests that the current turmoil in mortgage credit and securitization markets is related to recent excesses in those markets, and that securitization activity will resume after those excesses are cleared up.

Bank Capital, Securitization and Credit Risk: An Empirical Evidence

This paper is one of the first attempts to conduct an empirical investigation of the relationship between bank capital, securitization and bank risk-taking in a context of the rapid growth in off-balance-sheet activities. The data come from the Canadian financial sector. Evidence from the 1988-1998 period indicates that: (a) securitization has a negative statistical link with both current Tier 1 and Total risk-based capital ratios, and (b) there exists a positive statistical link between securitization and bank risk-taking. Profit-risk measure is more sensitive than loss-risk measure to the variation in securitization activity. These results seem to agree, during the studied period, with models indicating that banks might be induced to shift to more risky assets under the current capital requirements for credit risk because the regulatory capital levels are considered too high.

Securitisation and the Bank Lending Channel

The dramatic increase in securitisation activity has modified the functioning of credit markets by reducing the fundamental role of liquidity transformation performed by financial intermediaries. We claim that the changing role of banks from originate and hold to originate, repackage and sell has also modified banks' abilities to grant credit and the effectiveness of the bank lending channel of monetary policy. Using a large sample of European banks, we find that the use of securitisation appears to shelter banks' loan supply from the effects of monetary policy. Securitisation activity has also strengthened the capacity of banks to supply new loans but this capacity depends upon business cycle conditions as well as upon banks' risk positions. In this respect the recent experience of the sub-prime mortgage loans crisis is very instructive.

Federal Home Loan Bank Advances and Commercial Bank Portfolio Composition

The primary mission of the 12 cooperatively owned Federal Home Loan Banks (FHLBs) is to provide their members financial products and services to assist and enhance member housing finance. In this paper, we consider the role of the FHLBs' traditional product--'advances,' or collateralized loans to members--in stabilizing commercial bank members' residential mortgage lending activities. Our theoretical model shows that using membership criteria (such as a minimum of 10 percent of the portfolio being in mortgage-related assets) or using mortgage-related assets as collateral does not ensure that FHLB advances will be put to use for stabilizing members' financing of housing. Indeed, our model demonstrates that advances--a relatively low cost managed liability--are most likely to influence lending only when such liabilities are used to finance 'relationship' loans (i.e., loans to bank-dependent borrowers) that will be held on a bank's balance sheet and are least likely to influence lending for loans where the loan rate is heavily influenced by securitization activities, like mortgages. Using panel vector autoregression (VAR) techniques, we estimate recent dynamic responses of U.S. bank portfolios to FHLB advance shocks, to bank lending shocks, and to macroeconomic shocks. Our empirical findings are consistent with the predictions of our theoretical model. First, recent bank portfolio responses to FHLB advance shocks are of similar magnitude for mortgages, for commercial and industrial loans, and for other real estate loans. This suggests that advances are just as likely to fund other types of bank credit as to fund single-family mortgages. Second, unexpected changes in all types of bank lending are accommodated using FHLB advances. Third, FHLB advances do not appear to reduce variability in bank residential mortgage lending resulting from macroeconomic shocks. However, some banks appear to have used FHLB advances to reduce variability in commercial and industrial lending in response to such macroeconomic shocks. Thus, relatively low cost managed liabilities may be used to finance 'relationship' borrowers (which are typically business borrowers, rather than residential mortgage borrowers), although this use for advances appears to have diminished over time.

Synthetic Securitizations and Derivatives Transactions by Banks

With the growth in over-the-counter derivatives markets in recent years and the corresponding development of synthetic securitization technology, the regulatory issues surrounding structured finance transactions by United States banks and thrifts have become increasingly complex. In part because of this, securitization activities of banks have been increasingly a focus of regulatory concern. The use of derivatives by banks raises particular insolvency issues in transactions in which it is important to achieve credit de-linkage of the issuing entity9s assets from the credit or insolvency risk of the sponsor. It also raises important non-insolvency issues related to such matters as the regulatory capital treatment of such transactions and the application to such transactions of the rules governing transactions with affiliates. This article seeks to address the repudiation rights of the FDIC with respect to qualified financial contracts, the regulatory capital treatment of credit default swaps and synthetic securitizations, and the treatment of credit derivatives under the rules governing transactions between banks and their affiliates.

Determinants of Canadian Banks Securitization Activity

Securitization is one of the most important developments in the international finance over the past twenty years and one of the most sophisticated tools of modern finance. The main goal of this study is to examine the statistical link between securitization and risk-based capital ratios. Our results show that any increase in securitization activities relative to on-balance-sheet activities causes a decline in both Tier 1 and Total risk-based capital ratios. This suggests that the risk of securitization is inefficiently taken into account in capital ratios or under-estimated by banks managers.

The Effects of Securitization on Consumer Mortgage Costs

We examine the effects of securitization on two dimensions of consumer mortgage costs: coupon rates and loan origination fees. We find no evidence that securitization reduces the coupon rates on fixed‐ or adjustable‐rate mortgages. Instead, securitization appears to lower mortgage loan origination fees, resulting in substantial savings for consumers. Securitization activity includes passthrough creation and collateralized mortgage obligation (CMO) creation. We test for differences between the effects of passthrough and CMO creation on primary mortgage costs. Surprisingly, these activities appear to have indistinguishable effects on loan rates and origination fees, suggesting that a large derivatives market for mortgage loans is not creating value for consumers.

The Effects of Securitization on Consumer Mortgage Costs

We examine the effects of securitization on two dimensions of consumer mortgage costs: coupon rates and loan origination fees. We find no evidence that securitization reduces the coupon rates on fixed or adjustable-rate mortgages. Instead, securitization appears to lower mortgage loan origination fees, resulting in substantial savings for consumers. Securitization activity includes passthrough creation and collateralized mortgage obligation (CMO) creation. We test for differences between the effects of passthrough and CMO creation on primary mortgage costs. Surprisingly, these activities appear to have indistinguishable effects on loan rates and origination fees, suggesting a large derivatives market for mortgage loans isn't creating value for consumers.