The Real Effects of FAS 166/167 on Banks’ Mortgage Approval and Sale Decisions

We examine the real effects of FAS 166 and FAS 167 on banks’ loan‐level mortgage approval and sale decisions. Effective in 2010, these standards tightened the accounting for securitizations and consolidation of securitization entities, respectively, causing banks to recognize an estimated $811 billion of securitized assets on balance sheet. We find that banks that recognize more securitized assets exhibit larger decreases in mortgage approval rates and larger increases in mortgage sale rates. These effects significantly exceed those of banks’ off–balance sheet securitized assets, consistent with our results being driven by the consolidation of securitization entities rather than by securitization per se. We conduct tests that help rule out the financial crisis as an alternative explanation for our results. Further analyses suggest that mechanisms underlying the results include consolidating banks’ reduced regulatory capital adequacy, increased market discipline, and consequent desire not to recognize high‐risk mortgages on balance sheet.     

Investment horizon,risk, and compensation in the banking industry

This paper examines the relation between the investment horizon of banks and their CEO compensation, and its consequences for risk and performance. We find that banks with short-term investment intensity pay more cash bonus, exhibit higher risk and perform more poorly than banks with longer-term investment intensity. This evidence is broadly consistent with the view that short-term means of compensation encouraged a short-term investment focus, which in turn led to both higher risk and resulted in poorer performance, culminating in the sub-prime crisis. The inverse risk-performance relation suggests pay schemes were incongruent with shareholders’ interest. Moreover, pay arrangements used in banks prior to the subprime crisis exposed banks to the ex-post settling up problem (the clawback problem).     

Credit risk transfer in U.S. commercial banks: What changed during the 2007–2009 crisis?

Following the debate on the role of credit risk transfer (CRT) in exacerbating the 2007–2009 crisis, this paper investigates the usage and effects of loan sales, securitization, and credit derivatives in U.S. commercial banks over the last decade, with special emphasis on the financial crisis. We find that in times of severe funding constraints, the need to raise financial resources becomes the principal incentive behind CRT. We document some beneficial effects of CRT on the economy, since the funds released through CRT are subsequently invested by banks to sustain credit supply, also in recession. However, we report higher overall riskiness in banks that engage intensively in loans sales and securitization, which translates into higher default rates during the crisis. Interestingly, the benefits and drawbacks of CRT are much stronger for loan sales and securitization than for credit derivatives.     

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 systematic risk in European banking: Empirical evidence

Using a unique dataset of 592 cash and synthetic securitizations issued by 54 banks from the EU-15 plus Switzerland over the period from 1997 to 2007 this paper provides empirical evidence that credit risk securitization has a positive impact on the increase of European banks’ systematic risk. Baseline results hold when comparing estimated beta coefficients with a control group of similar non-securitizing banks. Building several sub-samples we additionally find that (a) the increase in systematic risk is more relevant for larger banks that repeatedly engage in securitization, (b) securitization is more important for small and medium financial institutions, (c) banks have a higher incentive to retain the larger part of credit risk as a quality signal at the beginning of the securitization business in Europe, and (d) the overall risk-shifting effect due to securitization is more distinct when the pre-event systematic risk is low.     

The role of securitization in bank liquidity and funding management

This paper studies the role of securitization in bank management. I propose a new index of “bank loan portfolio liquidity” which can be thought of as a weighted average of the potential to securitize loans of a given type, where the weights reflect the composition of a bank loan portfolio. I use this new index to show that by allowing banks to convert illiquid loans into liquid funds, securitization reduces banks' holdings of liquid securities and increases their lending ability. Furthermore, securitization provides banks with an additional source of funding and makes bank lending less sensitive to cost of funds shocks. By extension, the securitization weakens the ability of the monetary authority to affect banks' lending activity but makes banks more susceptible to liquidity and funding crisis when the securitization market is shut down.     

Securitization,competition and monitoring

We analyze the impact of loan securitization on competition in the loan market. Using a dynamic loan market competition model where borrowers face both exogenous and endogenous costs to switch between banks, we uncover a competition softening effect of securitization that allows banks to extract rents in the primary loan market. By reducing monitoring incentives, securitization mitigates winner’s curse effects in future stages of competition thereby decreasing ex ante competition for initial market share. Due to this competition softening effect, securitization can adversely affect loan market efficiency while leading to higher equilibrium profits for banks. This effect is driven by primary loan market competition, not by the exploitation of informational asymmetries in the secondary market for loans. We also argue that banks can use securitization as a strategic response to an increase in competition, as a tool to signal a reduction in monitoring intensity for the sole purpose of softening ex ante competition. Our result suggests that securitization reforms focusing exclusively on informational asymmetries in markets for securitized products may overlook competitive conditions in the primary market.     

Securitization and Bank Performance

Using predominantly precrisis U.S. commercial bank data, this paper employs a propensity score matching approach to analyze whether individual banks did improve their performance through securitization. On average, our results show that securitizing banks tend to be more profitable institutions, with higher credit risk exposure. Despite a more diversified funding structure, they face higher funding costs. We also find that securitizing banks tend to hold larger and less diversified loan portfolios, have less liquidity, and hold less capital. However, our analysis does not provide evidence to suggest that securitization had an impact upon bank performance.     

The impact of securitization on credit rationing: Empirical evidence

We study whether banks’ involvement into different types of securitization activity – asset backed securities (ABS) and covered bonds – in Spain influences credit supply before and during the financial crisis. While both ABS and covered bonds were hit by the crisis, the former were hit more severely. Employing a disequilibrium model to identify credit rationing, we find that firms with banks that were more involved in securitization see their credit constraints more relaxed in normal periods. In contrast, only greater covered bonds issuance reduces credit rationing during crisis periods whereas ABS aggravates these firms’ credit rationing in crisis periods. Our results are in line with the theoretical predictions that a securitization instrument that retains risk (covered bond) may induce a more prudent risk behavior of banks than an instrument that provides risk transferring (ABS).     

Mortgage Delivery to the Secondary Market when Interest Rates are Falling

A borrower whose loan is committed to the securitization process has the ability and incentive to switch lenders if market rates drop during the loan origination period, which creates significant exposure for primary lenders. A simple secondary market contract innovation we call a mortgage rate drop guarantee (MRDG) could shift this risk to the securitizers who represent portfolio investors. Our simulation results indicate this shifting would have improved the risk/return distribution faced by originators without damaging the risk/return position of securitizers during our 1977–2010 sample period. Assuming conservative loan lives and origination periods, and competitive lending markets, the risk reduction features of MRDGs could also have generated significant interest savings for borrowers.     

Employment effects of unconventional monetary policy: Evidence from QE

This paper investigates employment effects of the Federal Reserve’s quantitative easing policies (QE) via a bank lending channel. We find that banks with higher mortgage-backed securities holdings refinanced relatively more mortgages after the first round of QE, which increased local consumption and employment in the nontradable goods sector. In contrast, banks increased lending to firms and home purchase mortgage origination after the third round of QE, which led to a sizable increase in overall employment. Our findings are supported by new confidential loan-level data that show firms with stronger ties to affected banks increased employment and capital investment more during QE3.     

Liquidity risk management and credit supply in the financial crisis

Liquidity dried up during the financial crisis of 2007-2009. Banks that relied more heavily on core deposit and equity capital financing, which are stable sources of financing, continued to lend relative to other banks. Banks that held more illiquid assets on their balance sheets, in contrast, increased asset liquidity and reduced lending. Off-balance sheet liquidity risk materialized on the balance sheet and constrained new credit origination as increased takedown demand displaced lending capacity. We conclude that efforts to manage the liquidity crisis by banks led to a decline in credit supply.     

美国次贷危机对中国资产证券化业务的影响及建议

美国次按危机爆发至今,已给美国以及全球金融市场带来了巨大的冲击。面对中国资产证券化发展方向的探讨,文章通过分析美国次贷危机的成因、中国证券化业务发展的现状,对比出美国次贷与中国已开展的证券化业务的本质区别,指出我们应从美国次贷危机中吸取教训,加强业务风险的防范,充分利用我国此项业务开展的后发优势,适当加快试点的步伐。     

From new deal institutions to capital markets: Commercial consumer risk scores and the making of subprime mortgage finance

The investment fueled US mortgage market has traditionally been sustained by New Deal institutions called government sponsored enterprises (GSEs). Known as Freddie Mac and Fannie Mae, the GSEs once dominated mortgage backed securities underwriting. The recent subprime mortgage crisis has drawn attention to the fact that during the real estate boom, these agencies were temporarily overtaken by risk tolerant channels of lending, securitization, and investment, driven by investment banks and private capital players. This research traces the movement of a specific brand of commercial consumer credit analytics into mortgage underwriting. It demonstrates that what might look like the spontaneous rise (and fall) of a ‘free’ market divested of direct government intervention has been thoroughly embedded in the concerted movement of calculative risk management technologies. The transformations began with a sequence of GSE decisions taken in the mid-1990’s to implement a consumer risk score called a FICO^® into automated underwriting systems. Having been endorsed by the GSEs, this scoring tool was gradually hardwired throughout the industry to become a distributed and collective ‘market device’. As the paper will show, once modified by specific GSE interpretations the calculative properties generated by these credit bureau scores reconfigured mortgage finance into two parts: the conventional, risk-adverse, GSE conforming ‘prime’ and an infrastructurally distinct, risk-avaricious, investment grade ‘subprime’.     

Differences Across Originators in CMBS Loan Underwriting

There is considerable heterogeneity in the organizational structures of CMBS loan originators that may influence originators’ underwriting incentives. We examine data on over 30,000 commercial mortgages securitized into CMBS since 1999, and find significant differences in the propensity to become delinquent depending upon whether a loan was originated by a commercial bank, investment bank, insurance company, finance company, conduit lender, or foreign-owned entity. These differences hold both before and after controlling for key loan characteristics. We then explore possible explanations for these results. Reliance on external financing during a loan’s warehousing period—the period between origination and securitization—could explain the relatively poor performance of loans originated by conduit lenders. Also, despite the potential for engaging in adverse selection, balance-sheet lenders—commercial banks, insurance companies and finance companies—actually underwrote higher-quality loans.     

CRA Lending in a Changing Context: Evidence of Interaction with FHA and Subprime Originations

This article uses a unique demonstration program to examine the interaction of CRA-related lending with subprime and FHA lending activity. Specifically, the empirical analysis identifies the extent to which the origination of a CRA mortgage substitutes for FHA and subprime originations during the period 1998–2006. The results suggest that in the years prior to the expansion of the subprime market (1998–2001), the origination of CRA loans carried a small substitution effect with respect to FHA originations, with little to no impact on subprime originations. Conversely, during the years of the subprime industry’s growth (2002–2006), CRA originations substituted at a much higher rate for high-cost originations. These findings are suggestive about the dynamic role of community reinvestment lending within the changing context of the broader mortgage market. To the extent that CRA originations carry lower foreclosure risk than many subprime products, they also carry implications for the extent of neighborhood externalities in the wake of the subprime foreclosure crisis.     

The Risk‐Taking Channel of Monetary Policy: Exploring All Avenues

The literature on the risk‐taking channel of monetary policy grew quickly, leading to scattered evidence. We examine this channel through different angles, exploring detailed information on loan origination and performance. Ex ante riskier borrowers receive more funding at the extensive margin when interest rates are lower. Ex post performance is independent of the level of interest rates at origination. Still, loans granted in periods of very low and stable interest rates show higher default rates once interest rates start to increase. Risk‐taking is stronger among banks with lower capital ratios, suggesting that this channel may be linked to managerial incentives for risk‐shifting.     

The integration of the credit default swap markets during the US subprime crisis: Dynamic correlation analysis

This paper investigates the integration of the credit default swap (CDS) markets of 38 developed and emerging countries with the US market during the subprime crisis period by utilising dynamic conditional correlation from the multivariate GARCH model. Evidence reveals that the Lehman shock seems to have strengthened the integration, in particular, for developed markets. For both developed and emerging markets, declining US interest rates are found to be the main driving factor behind the higher level of correlation, suggesting that the CDS markets were heavily driven by the world largest economy when the crisis reached its peak.     

Securitization and systemic risk: An empirical investigation on Italian banks over the financial crisis

This research examines the effects of securitization on the bank's risk exposure both in terms of individual expected shortfall and marginal expected shortfall as a measure of systemic risk. The relationship between securitization activity and tail risks is especially relevant in light of the consequences for financial stability, both for the individual securitizing banks and for the market as a whole, as the financial crisis 2007–2008 reveals. By using a sample of Italian listed banks over the period 2000–2009, we find that securitizing banks have, on average, higher expected losses in case of extreme events. This adds new evidence on the main findings in the literature that focused on the evidence that risk transfer through securitization is relatively insignificant compared to the risk retained by the originating bank. We show that this risk retention is in terms of an increase of tail risk. We also find that securitization increases the probability of banks to become “systemically” riskier, but we find no difference when comparing the pre-crisis with the post-crisis period. This suggests that the systemic exposures of Italian banks are still as high as before the crisis with severe implications for financial stability.     

次贷危机中资产证券化对金融市场流动性的影响

次贷危机是一场金融市场流动性紧缩的危机.在流动性紧缩的过程中,连接多个利益主体的资产证券化负有很大责任.本文采用计量经济理论中的VAR模型对次贷危机中资产证券化对金融市场流动性的影响进行实证分析,发现在次贷危机的演进过程中,资产证券化确实对金融市场的流动性产生了持久的负面冲击效应,并导致了流动性紧缩的传导和扩散.因此,...