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Journal of Financial Services Research

Erschienen in:

01.06.2011

Securitization and Banks’ Equity Risk

verfasst von: Deming Wu, Jiawen Yang, Han Hong

Erschienen in: Journal of Financial Services Research | Ausgabe 3/2011

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Abstract

This research explores the effects of securitization on the market’s perception of banks’ risk exposure between 2002 and 2007. Our results show that, contrary to some prior evidence in the literature, securitizing banks actually had lower systematic betas until 2007. We find no evidence of increasing idiosyncratic risk with securitization. We identify significant structural break in 2007, when securitizing banks experienced jumps in both systematic and idiosyncratic risks. Finally, we confirm the general belief that larger banks tend to have higher systematic risk and lower idiosyncratic risk because of diversification.

Nächster Artikel Mergers & Acquisitions, Diversification and Performance in the U.S. Property-Liability Insurance Industry

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See Allen and Carletti (2006), Ambrose et al. (2005), Krahnen and Wilde (2006), OCC (1997), and Thomas and Wang (2004), for different motivations of asset securitization and their impacts on banks’ risk profiles.

Here we distinguish between expected loss and unexpected loss (tail risk). Junior securities in asset securitization absorb most of the expected loss, while investors in senior securities bear some unexpected loss.

It should be noted that different authors use different risk measures. Some studies use accounting risk measures, while we use equity risk measures. One should be cautioned against drawing definitive conclusions from results using different risk measures.

Specifically, if there are two non-negative and positively correlated explanatory variables and the true relation is \( y = {x_1}{\beta_1} + {x_2}{\beta_2} + u \), and if β ₂ is positive, then omitting x ₂ from the equation could cause the estimate of β ₁ to be biased upward.

Schuermann et al. (2006) results show that larger banks have higher market betas than smaller banks.

Another approach is to directly model the bank securitization decision as an endogenous variable and study the impact of securitization with instrument variables. This approach suffers from three major limitations. First, modeling a bank’s securitization decision itself can be complicated, and often results in little model predictive power. Second, choosing the instrument variables often requires a series of assumptions that are hard to test, and the instrument variables often perform poorly. Finally, it is often not the case that a bank’s securitization decision at a given time that affects its risk profile; it is usually the bank’s entire securitization history that produces its current risk profile.

For ease of exposition, we use the same notation for coefficients in both equations although there is no linkage between coefficients in the two equations.

Our decision to measure systematic risk in terms of a bank’s market beta is based on preliminary analysis that the market factor clearly dominates other systematic factors in explaining bank returns. Other macro factors play only a marginal role.

These items are reported in Schedules HC, and HC-B through HC-N, HC-R, and HC-S in the bank holding company database at the Federal Reserve Bank of Chicago.

We exclude Sigma_TB, Sigma_CP, Sigma_Credit, Sigma_Yen, and Sigma_ABS in the final variance regressions because they are highly correlated with Sigma_RM and also highly correlated with each other (pairwise correlations between 0.69 and 0.96).

Allen F, Gale DM (2005) Systemic risk and regulation. Wharton Financial Institutions Center Working Paper No. 95-24

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Ambrose BW, Michael LL, Sanders AB (2005) Does regulatory capital arbitrage, reputation, or asymmetric information drive securitization? J Financ Serv Res 28(1–3):113–133CrossRef

Cantor R, Rouyer S (2000) Another perspective on credit risk transfer and assets securitization. J Risk Finance 1(2):37–47CrossRef

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Jiangli WY, Pritsker M (2008) The impacts of securitization on US bank holding companies. Social Science Research Network. Working Paper

Krahnen JP, Wilde C (2006) Risk transfer with CDOs and systemic risk in banking. Working Paper No. 2006/04, Center for Financial Studies, Frankfurt University

Landsman W, Peasnell K, Shakespeare C (2006) Are asset securitizations sales or loans? Working Paper, University of North Carolina at Chapel Hill

Niu FF, Richardson GD (2006) Are securitization in substance sales or secured borrowings? Capital market evidence. Contemp Acc Res 23(4):1105–1133CrossRef

OCC (1997) Asset securitization comptroller's handbook. Office of the Comptroller of the Currency

Schuermann T, Kevin J, Stiroh KJ (2006) Visible and hidden risk factors for banks. Working Paper, Federal Reserve Bank of New York

Thomas H, Wang ZQ (2004) Banks’ securitization and risk management. Working Paper, Chinese University of Hong Kong

Uzun H, Webb E (2007) Securitization and risk: empirical evidence on US banks. J Risk Finance 8(1):11–23CrossRef

Titel: Securitization and Banks’ Equity Risk
verfasst von: Deming Wu
Jiawen Yang
Han Hong
Publikationsdatum: 01.06.2011
Verlag: Springer US
Erschienen in: Journal of Financial Services Research / Ausgabe 3/2011
Print ISSN: 0920-8550
Elektronische ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-010-0092-5