Have SFAS 166 and SFAS 167 improved the financial reporting for securitizations?

Critics have alleged that securitization accounting prior to 2010 was among the causes of the recent financial crisis. In response to this criticism, the Financial Accounting Standards Board (FASB) implemented two new accounting standards, SFAS 166 and SFAS 167, to improve the financial reporting for securitizations. Bank regulators have stated their belief that SFAS 166/167 will result in a consolidated balance sheet (and risk-based capital ratios based thereupon) that better reflects a bank's exposure to risk related to securitized assets. We document that, by ceding retained power or influence through the servicing/special servicing functions to third parties, SFAS 166/167 resulted in real effects to the extent that banks (particularly those that were weakly capitalized) achieved their accounting objectives in the post-SFAS 166/167 period through legitimate transaction structuring in line with the intent of the new rules. Further, we use capital market participants’ assessments of risk retention by sponsoring banks as a benchmark, and provide evidence consistent with bank regulators’ beliefs. In particular, following SFAS 166/167, equity investors of sponsoring banks do not consider (consider) as risk relevant securitized assets that receive off-balance sheet (on-balance sheet) treatment. Securitized assets that are consolidated under SFAS 166/167 exhibit the same risk relevance as assets that are not securitized, despite contractual provisions that would seem to imply substantial risk transfer.     

Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Originations

Low-cost deposits and increased balance sheet liquidity raise banks' supply of illiquid loans more than loans easily sold or securitized. We exploit the inability of Fannie Mae and Freddie Mac to purchase jumbo mortgages to identify an exogenous change in liquidity. The volume of jumbo mortgage originations relative to nonjumbo originations increases with bank holdings of liquid assets and decreases with bank deposit costs. This result suggests that the increasing depth of the mortgage secondary market fostered by securitization has reduced the effect of lender's financial condition on credit supply.     

GSEs,Mortgage Rates,and the Long-Run Effects of Mortgage Securitization

Our paper compares mortgage securitization undertaken by government-sponsored enterprises (GSEs) with that undertaken by private firms, with an emphasis on how each type of mortgage securitization affects mortgage rates. We build a model illustrating that market structure, government sponsorship, and the characteristics of the mortgages securitized are all important determinants of mortgage rates. We find that GSEs generally—but not always—lower mortgage rates, particularly when the GSEs behave competitively, because the GSEs implicit government backing allows them to sell securities without the credit enhancements needed in the private sector. Using our simulation model, we demonstrate that when mortgages eligible for purchase by the GSEs have characteristics similar to other mortgages, the GSEs implicit government-backing generates differences in mortgage rates similar to those currently observed in the mortgage market (which range between zero and fifty basis points). However, if the mortgages purchased by GSEs are less costly to originate and securitize, and if the GSEs behave competitively, then the simulated spread in mortgage rates can be much larger than that observed in the data.     

When it comes to the crunch: What are the drivers of the US banking crisis?

This article considers how permissive regulatory conditions helped change the size and scope of the US mortgage market. Asset backed securitization facilitated an expansion of the US mortgage market and modified the structure of the value chain within which financial assets, risk and liquidity were managed. New sophisticated mortgage products, indulgent lending practices, loose credit assessment and flimsy documentation increased the probability of mortgage default in an economic downturn. US banks were not in a position to absorb mark-to-market losses on mortgage assets and goodwill impairment resulting from a credit crunch because they operate with narrow profit margins and a limited equity cushion in the balance sheet. This article questions the viability and sustainability of this banking business model.     

The rise of China's securitization market

We study the development of asset securitization markets in China. We manually collect all asset securitization projects and securities data from 2005 to 2015. Inspection of this sample combined with related policy changes reveals distinct characteristics and some potential problems. At the macro level, asset securitization market in China is policy driven, regulation‐segmented, and highly illiquid. At the micro level, the underlying assets are mainly corporate loans or assets, rather than mortgage or consumption loans as in the US and European markets. State owned commercial banks and enterprises enjoy significantly lower interest rates when issuing securitization bonds. Finally, risk‐isolation and credit enhancing techniques significantly improve the rating of asset‐backed securities.     

Securitization and optimal foreclosure

Does securitization distort the foreclosure decisions of non-performing mortgages? In a model of mortgage-backed securitization with an endogenous foreclosure policy, we find that the securitizing bank adopts a tougher foreclosure policy than the first-best, despite resulting in higher loan losses. This is optimal because foreclosure mitigates the adverse selection problem in securitization by making the optimal security, a risky debt, less information-sensitive. We further show that policies that limit mortgage foreclosure would discourage the bank’s ex ante screening effort, reducing the quality of securitized mortgages. Our model yields novel testable predictions on the effect of mortgage securitization on foreclosure rates, loan performance, and mortgage servicing.     

A study on risk retention regulation in asset securitization process

We study the impacts of the recently proposed risk retention regulation for asset securitization, i.e. the issuer has to retain a certain proportion of securitized assets. We also consider the frequently discussed measure to require the issuer disclose certain information of the securitized assets. In a dynamic model with asymmetric information between a risk-averse originating bank and a continuum of risk-averse investors, we find that it is impossible for a flat-rate retention requirement to be optimal for all asset types. Although both risk retention and information disclosure regulations are effective in reducing investors’ informational loss, neither can unconditionally enhance social welfare upon the unregulated case. For both measures, there are associated regulatory cost: risk retention regulation aggravates adverse selection problem because it undermines the channel of informational revelation by the choice of securitization intensity, and information disclosure requirement incurs a signalling cost by distorting banks’ securitization intensity in sending signals. Under an appropriate set of conditions we find that information disclosure requirement complements risk retention regulation when investors are sufficiently risk averse.     

Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability

This article develops a model of the interactions between borrowers, originators, and a securitizer in primary and secondary mortgage markets. In the secondary market, the securitizer adds liquidity and plays a strategic game with mortgage originators. The securitizer sets the price at which it will purchase mortgages and the credit-score standard that qualifies a mortgage for purchase. We investigate two potential links between securitization and mortgage rates. First, we analyze whether a portion of the liquidity premium gets passed on to borrowers in the form of a lower mortgage rate. Somewhat surprisingly, we find very plausible conditions under which securitization fails to lower the mortgage rate. Second, and consistent with recent empirical results, we derive an inverse correlation between the volume of securitization and mortgage rates. However, the causation is reversed from the standard rendering. In our model, a decline in the mortgage rate causes increased securitization rather than the other way around.     

Do bank managers use securitization gains to smooth earnings in the post- FAS 166/167 period?

Previous literature has documented that securitization gains were used for income smoothing in the era before FAS 166 and FAS 167,¹ which tightened the requirements for sale accounting for securitizations. Using securitizing bank holding companies, we examine whether FAS 166/167 has reduced this income smoothing behavior. Our findings include two facets. First, at the aggregate level, time series statistics show that both the frequency of non-zero securitization gains reported and the magnitude of reported securitization gains are significantly reduced in the post- FAS 166/167 period. Second, at the firm level, our regression results indicate that even though the extent of this income smoothing behavior decreased after the issuance of FAS 166/167, securitization gains continue to be used to smooth earnings by securitizing banks in the post-FAS 166/167 period. Overall, our findings convey that FAS 166/167 has reduced the securitization gains recorded by banks but that after the regulation, banks still use securitization gains to smooth earnings.     

Why don't Lenders renegotiate more home mortgages? Redefaults,self-cures and securitization

A leading explanation for the lack of widespread mortgage renegotiation is the existence of frictions in the mortgage securitization process. This paper finds similarly small renegotiation rates for securitized loans and loans held on banks' balance sheets that become seriously delinquent, in particular during the early part of the financial crisis. We argue that information issues endemic to home mortgages, where lenders negotiate with large numbers of borrowers, lead to barriers in renegotiation. Consistent with the theory, renegotiation rates are strongly negatively correlated with the degree of informational asymmetries between borrowers and lenders over the course of the crisis.     

Securitized banking and the run on repo

The panic of 2007–2008 was a run on the sale and repurchase market (the repo market), which is a very large, short-term market that provides financing for a wide range of securitization activities and financial institutions. Repo transactions are collateralized, frequently with securitized bonds. We refer to the combination of securitization plus repo finance as “securitized banking” and argue that these activities were at the nexus of the crisis. We use a novel data set that includes credit spreads for hundreds of securitized bonds to trace the path of the crisis from subprime-housing related assets into markets that had no connection to housing. We find that changes in the LIB-OIS spread, a proxy for counterparty risk, were strongly correlated with changes in credit spreads and repo rates for securitized bonds. These changes implied higher uncertainty about bank solvency and lower values for repo collateral. Concerns about the liquidity of markets for the bonds used as collateral led to increases in repo haircuts, that is the amount of collateral required for any given transaction. With declining asset values and increasing haircuts, the US banking system was effectively insolvent for the first time since the Great Depression.     

Securitization and the balance sheet channel of monetary transmission

This paper shows that the balance sheet channel of monetary transmission is stronger for US banks that securitize their assets. This finding is different, in spirit, from the widely-found negative relationship between financial development and the strength of the lending channel of monetary transmission. Focusing on the balance sheet channel, and using bank-level observations, we find that securitizing banks are more sensitive to borrowers’ balance sheets and that monetary policy has a greater impact on this sensitivity for securitizing banks. The optimality conditions from a simple partial equilibrium framework suggest that the positive effects of securitization on policy effectiveness could be due to the high sensitivity of security prices to policy rates.     

Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?

Banks can choose to keep loans on balance sheet as private debt or transform them into public debt via asset securitization. Securitization transfers credit and interest rate risk, increases liquidity, augments fee income, and improves capital ratios. Yet many lenders still retain a portion of their loans in portfolio. Do lenders exploit asymmetric information to sell riskier loans into the public markets or retain riskier loans in portfolio? If riskier loans are indeed retained in portfolio, is this motivated by regulatory capital incentives (regulatory capital arbitrage), or a concern for reputation? We examine these questions empirically and find that securitized mortgage loans have experienced lower ex-post defaults than those retained in portfolio, providing evidence consistent with either the capital arbitrage or reputation explanation for securitization.     

The effect of foreclosure laws on securitization: Evidence from U.S. states

A mortgage that defaults is more likely to enter foreclosure rather than renegotiation if it has been securitized in the private non-agency market, according to previous research. We study whether this foreclosure-propensity affects lenders’ securitization decision ex-ante. Due to the higher foreclosure probability, the value of a mortgage should be more sensitive to foreclosure costs if it is securitized. Comparing loans made in the same metropolitan area but under different foreclosure laws, we find that lenders are less likely to securitize mortgages in states with higher foreclosure costs, as measured by laws requiring judicial foreclosure. Two additional results are consistent with the proposed channel. First, the effect increases for loans with higher expected default rates and disappears for mortgage-like loans not subject to these laws. Second, the effect of judicial requirements increases for loans with higher expected default rates, consistent with differences in loss given default driving the results. Borrowers in states without judicial requirements also get riskier loans.     

The Cross‐Market Spillover of Economic Shocks through Multimarket Banks

This study investigates the mortgage lending of banks operating in multiple U.S. metropolitan areas during the housing market collapse of 2007–09. We show that multimarket banks reduced local portfolio lending in response to high overall mortgage delinquencies in their other markets, consistent with the view that local economic shocks can be transmitted to other regions through banks’ internal capital markets. This spillover was greatest when the bank lacked a branch presence and when the market was highly peripheral to the bank in terms of its total mortgage lending. These effects were not fully offset by securitization or other portfolio lenders.     

Short-term safety or long-term failure? Empirical evidence of the impact of securitization on bank risk

Based on a sample of U.S. commercial banks from 2002 to 2012, this paper shows that bank loan securitization has a significant and positive impact on both Z-scores and the likelihood of bank failure, indicating a short-term risk reduction and a long-term risk increase effect. We also find disparate impacts between mortgage and non-mortgage securitization. Loan sale activities are found to have a similar impact to securitization.     

Enhancing Loan Quality Through Transparency: Evidence from the European Central Bank Loan Level Reporting Initiative

We explore whether transparency in banks’ securitization activities enhances loan quality. We take advantage of a novel disclosure initiative introduced by the European Central Bank, which requires, as of January 2013, banks that use their asset‐backed securities as collateral for repo financing to report securitized loan characteristics and performance in a standardized format. We find that securitized loans originated under the transparency regime are of better quality with a lower default probability, a lower delinquent amount, fewer days in delinquency, and lower losses upon default. Additionally, banks with more intensive loan level information collection and those operating under stronger market discipline experience greater improvement in their loan quality under the new reporting standards. Overall, we demonstrate that greater transparency has real effects by incentivizing banks to improve their credit practices.     

基于经济后果分析的资产证券化会计问题研究

资产证券化被确认为发起企业的“真实销售”还是“担保融资”,以及发起企业是否合并SPE的会计报表,是资产证券化会计的两个关键问题。本文分析了不同会计处理下的经济后果。论文认为,将资产证券化作为“真实销售”处理与不合并SPE对发起人、证券投资者更有吸引力,也更有助于推动资产证券化业务的发展。然而,如果发起人为了达到一定目的而滥用“真实销售”与不合并SPE以操控报表数据,导致会计信息不能反映经济交易的实质,既有可能影响发起企业原债权人的利益,也会加大证券投资者的风险,最终将危及资产证券化业务的正常推进。因此资产证券化会计必须明确规范“真实销售”与不合并SPE的条件。     

Did securitization affect the cost of corporate debt?

This paper investigates whether the securitization of corporate bank loan facilities had an impact on the price of corporate debt. Our results suggest that loan facilities that are subsequently securitized are associated with a 17 basis point lower spread than that of facilities that are not subsequently securitized. We consider facility characteristics that are associated with the likelihood of securitization and estimate the extent to which these characteristics are related to spreads. We document that Term Loan B facilities, facilities of B-rated firms, and facilities originated by banks that originate CLOs are securitized more frequently than other facilities. Spreads on facilities estimated to be more likely to be subsequently securitized have lower spreads than otherwise similar facilities. The results are consistent with the view that securitization caused a reduction in the cost of capital.     

Does Fair Value Accounting Exacerbate the Procyclicality of Bank Lending?

This study investigates whether fair value accounting contributes to the procyclicality of bank lending. Using banks’ approval/denial decisions on residential mortgage applications to capture banks’ supply of credit, I find no evidence that fair value accounting has procyclical effects on bank lending over the past two business cycles. I further identify two reasons for this result. First, the main accounting item distinguishing fair value accounting from historical cost accounting—unrealized gains and losses on available‐for‐sale securities—does not affect lending decisions. Second, unrealized gains and losses on available‐for‐sale securities are not procyclical, as the risk‐free interest rate rises during some expansionary periods, resulting in unrealized losses, while the risk‐free interest rate (and sometimes the default spread) falls during some recessionary periods, resulting in unrealized gains.