Working Paper: NBER ID: w11741
Authors: Günter Franke; Jan Pieter Krahnen
Abstract: This paper contributes to the economics of financial institutions risk management by exploring how loan securitization affects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to expand its loan business, thereby affecting systematic risk. For a sample of European CDO issues, we find an increase of the banks' betas, but no significant stock price effect around the announcement of a CDO issue.
Keywords: No keywords provided
JEL Codes: D82; G21; D74
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Securitization (G10) | Banks' default risk (G21) |
| Retention of first loss piece (Y20) | Banks' default risk (G21) |
| Selling senior tranches (G19) | Efficient risk allocation (D61) |
| Securitization (G10) | Banks' exposure to extreme risks (F65) |
| Risk of extreme unexpected losses (G33) | Investors (G24) |
| CDO announcements (E60) | Banks' betas (G21) |
| Banks' betas (G21) | Risk-taking behavior (D91) |