CLO trading and collateral manager bank affiliation |
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| Institution: | 1. Federal Reserve Bank of New York, 33 Liberty Street, Main 3, New York, NY 10045, United States;2. Federal Reserve Bank of New York & Nova School of Business and Economics, 33 Liberty Street, Main 3, New York, NY 10045, United States;1. Federal Reserve Bank of New York, 33 Liberty Street, Main 3, New York, NY 10045, United States;2. Federal Reserve Bank of New York & Nova School of Business and Economics, 33 Liberty Street, Main 3, New York, NY 10045, United States;1. Wharton School, University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104, USA;2. Leeds School of Business, University of Colorado at Boulder, 995 Regent Drive, Boulder, CO 80302, USA;1. London School of Economics, Houghton Street, London WC2A 2AE, UK;2. Essex Business School, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK;1. University of Amsterdam, Netherlands;2. CEPR, United Kingdom;3. Olin Business School, Washington University in St. Louis, United States;4. ECGI, Belgium;1. Columbia Business School, USA |
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| Abstract: | This paper investigates whether the institutional affiliation of a collateralized loan obligation (CLO) manager influences the manager's access to information and risk appetite. We find that CLO managers affiliated with banks start to sell off their positions in loans arranged by their bank well before the onset of default. In contrast, CLO managers affiliated with nonbanks do not lower their exposures to distressed loans. These findings are consistent with bank-affiliated CLO managers being more risk averse, but they could also derive from them having access to valuable information. On close inspection, we find that although bank-affiliated CLO managers are averse to holding any distressed loans, they are also more aggressive at divesting distressed loans arranged by their parent bank, suggesting that they benefit from an information wedge. Besides helping us understand CLO managers’ trading activities, our findings highlight a potential limit to banks’ ability to originate loans and distribute them via their affiliated CLOs. |
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