Anna Sarkisyan* under the supervision of Barbara Casu, Andrew Clare, Stephen Thomas Emerging...
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Anna Sarkisyan*Anna Sarkisyan*
under the supervision ofunder the supervision of
Barbara Casu, Andrew Clare, Stephen ThomasBarbara Casu, Andrew Clare, Stephen Thomas
Emerging Scholars in Banking and Finance ConferenceLondon, 9 December 2009
Securitization and Credit Risk Taking:Securitization and Credit Risk Taking: Empirical Evidence from US Bank Holding CompaniesEmpirical Evidence from US Bank Holding Companies
Outline
Introduction Previous Studies Motivation Main Objective and Contributions Securitization and Bank Credit Risk Taking Hypothesis and Empirical Specification Data and Methodology Results Robustness Tests Discussion and Conclusions
Introduction Securitization is a structured process whereby a bank transforms its illiquid assets, traditionally
held until maturity, into marketable securities A typical securitization transaction includes the pooling of endogenous financial assets with fixed
or nearly fixed cash flows and transferring the pool to a special purpose vehicle (SPV), a bankruptcy-remote entity that in turn finances the purchase through the issuance of securities backed by the pool:
The tremendous growth of the securitization market in recent years, and its consequent collapse during the recent financial turmoil, has highlighted the importance of understanding the implications of securitization for the banking sector
Borrower BankSpecial Purpose Vehicle
ABS Investor
CreditEnhancements
Pool of AssetsService
Receivables Cash
Securities
Cash
Rating Agency
TrusteeServicer
Previous Studies
Early theoretical studies agree that securitization provides means to reduce bank riskGreenbaum and Thakor, 1987; Pavel and Phillis, 1987; Hess and Smith, 1988; Zweig, 1989
Further research has investigated the risk effect of securitization from several perspectives:
Quality of assets securitized/retained and the ensuing effect on bank risk
Cantor and Rouyer, 2000; Dionne and Harchaoui, 2003; Ambrose et al. , 2004; Carey, 1998; Mian and Sufi, 2008; Keys et al., 2008; Dell’Ariccia et al., 2009
Recourse provided by the originating bank and the resulting risk implications
Gorton and Pennacchi,1995; Calomiris and Mason, 2004; Higgins and Mason, 2003; Chen et al., 2008; Vermilyea et al., 2008
Total risk effect for the originating bank
Krahnen and Wilde, 2006; Haensel and Krahnen, 2007; Franke and Krahnen, 2005; Cebenoyan and Strahan, 2004; Purnanandam, 2009; Jiangli and Pritsker, 2008
In general the studies suggest a positive link between securitization and bank risk
Motivation
By and large, previous empirical studies on how securitization affects the issuing banks suggest a positive link between securitization and banks’ risk
However, little research has been done to examine the effect of securitization on a particular type of risk, namely credit risk
By allowing banks to convert illiquid assets into liquid funds, securitization may well favor both the expansion of credit supply and the shift towards riskier assets in banks’ portfolios
The existing literature on the former issue shows that securitization reduces the influence of a bank’s financial condition on credit supply (Loutskina and Strahan, 2006)
However, little evidence has been collected on how securitization affects banks’ willingness to extend riskier assets in their portfolios
Main Objective and Contributions
Main Objective:
To focus on a particular type of risk, namely credit risk, and assess the impact of securitization on the credit-risk taking behavior of banks
Contributions:
Examines whether securitization has an impact on banks’ credit-risk taking behavior
Tests whether the effect of securitization on the credit-risk taking behavior of banks differs across securitizations of different asset classes
Uses a comprehensive dataset comprising new data on banks’ securitization activities
Securitization and Bank Credit Risk Taking
Since securitization provides banks with an additional source of loan financing and liquidity, it might motivate them to shift their portfolios towards higher risk/return assets (Cebenoyan and Strahan, 2004; Purnanandam, 2009)
However, typically issuing banks retain first-loss contractual interests and/or provide implicit recourse in securitizations. These arrangements mean that the risks inherent in the securitized assets have not been transferred to investors and are, in effect, held by the issuing bank, but off-balance-sheet (Calomiris and Mason, 2004; Chen et al., 2008; Higgins and Mason, 2003; Niu and Richardson, 2006; Vermilyea et al., 2008)
Therefore outstanding securitization exposes the issuing bank to significant credit risk
Assuming that the risk exposure arising from the securitized pool is perceived by the bank, we hypothesize that this should have an impact on the bank’s risk-taking behavior
Hypothesis and Empirical Specification
Hypothesis:
Greater outstanding securitization, and therefore greater credit risk exposure arising from the pool, should make banks more risk-averse and motivate them to shift their portfolios towards assets of lower credit risk
Empirical Specification:
∆CrRi,t – change in the credit risk of bank i's portfolio in period t
Seci,t-1 – bank’s outstanding balance of securitized assets scaled by total assets at time t-1
Sizei,t-1 – bank size at time t-1
Zi,t-1 – vector of bank-specific characteristics at time t-1
GDPGi,t - GDP growth
Quartert – quarter dummies
' ' ', 1 , 1 2 , 1 , 1 , ,i t i i t i t i t i t t i tCrR Sec Size GDPG Quarter
Data and Methodology
US Bank Holding Company (BHC) Data from Y-9CLP forms from 2001:Q2 to 2007:Q4US Bank Holding Company (BHC) Data from Y-9CLP forms from 2001:Q2 to 2007:Q4
42,685 bank-quarters for 2,190 BHCs: 230 securitizers 1,960 non-securitizers
Analysis:Analysis:
i. Univariate analysis of securitizers and non-securitizers
ii. Fixed effects regression analysis using the sample of securitizers: Aggregate outstanding securitization Outstanding securitization by asset type
iii. Robustness Tests
Empirical Results: Univariate Analysis All Banks Securitizers Non-Securitizers Difference in Means Variable
N Mean StD N Mean StD N Mean StD (abs) (%) p-values
Balance Sheet Structure
Total Assets ($ billions) 2190 5.254 52.286 230 40.961 156.486 1960 1.064 5.001 39.897 3749.7% 0.000
Liquidity Ratio 2190 0.263 0.123 230 0.247 0.111 1960 0.265 0.124 -0.018 -6.8% 0.029
Loan Ratio 2190 0.664 0.125 230 0.660 0.123 1960 0.665 0.125 -0.005 -0.8% 0.577
Deposits/Assets Ratio 2190 0.681 0.088 230 0.621 0.124 1960 0.688 0.079 -0.067 -9.7% 0.000
Loans/Deposits Ratio 2190 0.999 0.289 230 1.122 0.380 1960 0.984 0.273 0.138 14.0% 0.000
Equity/Assets Ratio 2190 0.091 0.032 230 0.092 0.036 1960 0.091 0.032 0.001 1.1% 0.588
Loan Portfolio
Real Estate Loan Ratio 2190 0.708 0.151 230 0.674 0.174 1960 0.712 0.148 -0.038 -5.3% 0.002
C&I Loan Ratio 2190 0.160 0.095 230 0.165 0.086 1960 0.159 0.095 0.006 3.8% 0.373
Consumer Loan Ratio 2190 0.080 0.085 230 0.096 0.115 1960 0.078 0.081 0.018 23.1% 0.018
Other Loan Ratio 2190 0.053 0.081 230 0.065 0.099 1960 0.051 0.079 0.014 27.5% 0.042
Loan HHI 2190 0.585 0.150 230 0.560 0.156 1960 0.588 0.150 -0.028 -4.8% 0.009
Regulatory Capital
Tier I Leverage Ratio 2190 9.324 3.822 230 9.274 7.506 1960 9.330 3.120 -0.056 -0.6% 0.910
Tier I Risk-Based Capital Ratio
2190 13.327 6.636 230 12.743 12.168 1960 13.395 5.644 -0.652 -4.9% 0.423
Total Risk-Based Capital Ratio
2190 14.836 6.943 230 14.612 12.742 1960 14.862 5.906 -0.250 -1.7% 0.769
Risk Characteristics
Credit Risk 2190 0.712 0.118 230 0.728 0.137 1960 0.710 0.115 0.018 2.5% 0.054
Non-Performing Loan Ratio 2190 0.009 0.008 230 0.010 0.007 1960 0.009 0.008 0.001 11.1% 0.038
Charge-Off Ratio 2190 0.003 0.007 230 0.005 0.012 1960 0.003 0.006 0.002 66.7% 0.017
Loan Loss Provision Ratio 2190 0.004 0.007 230 0.006 0.014 1960 0.004 0.005 0.002 50.0% 0.050
Operating performance
Return on Assets 2190 0.011 0.007 230 0.012 0.013 1960 0.011 0.005 0.001 9.1% 0.076
Return on Equity 2190 0.124 0.076 230 0.123 0.126 1960 0.124 0.068 -0.001 -0.8% 0.970
Revenue HHI 2190 0.697 0.094 230 0.644 0.098 1960 0.703 0.092 -0.059 -8.4% 0.000
Interest Income/ Net Operating Revenue
2190 0.7917 0.108 230 0.7126 0.1537 1960 0.801 0.0972 -0.088 -11.0% 0.000
Noninterest Income/ Net Operating Revenue
2190 0.208 0.108 230 0.287 0.154 1960 0.199 0.097 0.088 44.2% 0.000
Securitization Activity
Securitized Assets/Loans Ratio
230 0.144 0.515
Securitized Assets/Assets Ratio
230 0.084 0.299
Securitizing banks are significantly
larger, hold less liquid assets but
more diversified loan portfolios;
they are more risky and more
profitable institutions earning a
higher share of revenue from non-
interest income compared to non-
securitizers
Empirical Results: Regression Analysis I
Model 1 Model 2 Model 3 Securitization -0.006 -0.006 -0.004 (0.001)*** (0.001)*** (0.001)*** Size 0.005 0.006 -0.004 (0.004)* Loan -0.118 (0.014)*** Capital -0.01 -0.071 ROA -0.027 -0.075 Charge-Off -0.153 (0.092)* GDPG 0.001 0.001 0.000 (0.000)*** (0.000)*** 0.000 Constant -0.001 -0.072 -0.015 -0.002 -0.056 -0.051 Observations 4837 4837 4837 Number of banks 230 230 230 Adjusted R-squared 0.02 0.02 0.06
Empirical Results: Regression Analysis II
(1) (2) (3) (4) (5) (6) (7) (8) Securitization -0.004 (0.001)* Mortgages -0.003 (0.001)* Home Equity Lines -0.426 (0.101)* Credit Cards -0.05 -0.047 Auto Loans 0.045 (0.022)** Other Consumer Loans -0.169 -0.124 C&I loans -0.068 (0.039)*** Other Loans and Leases -0.039 -0.052 Size 0.006 0.006 0.006 0.006 0.006 0.006 0.006 0.006 (0.004)*** (0.004)*** (0.004)*** -0.004 (0.004)*** (0.004)*** (0.004)*** (0.004)*** Loan -0.118 -0.118 -0.12 -0.12 -0.12 -0.119 -0.12 -0.121 (0.014)* (0.014)* (0.013)* (0.013)* (0.013)* (0.014)* (0.013)* (0.014)* Capital -0.01 -0.011 -0.011 -0.017 -0.019 -0.01 -0.014 -0.011 -0.071 -0.071 -0.07 -0.073 -0.071 -0.071 -0.071 -0.072 ROA -0.027 -0.026 -0.042 -0.043 -0.03 -0.034 -0.031 -0.031 -0.075 -0.076 -0.07 -0.07 -0.076 -0.073 -0.074 -0.074 Charge-Off -0.153 -0.158 -0.148 -0.113 -0.163 -0.155 -0.156 -0.154 (0.092)*** (0.092)*** -0.09 -0.095 (0.092)*** (0.092)*** (0.092)*** (0.093)*** GDPG 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Constant -0.015 -0.014 -0.007 -0.002 -0.008 -0.014 -0.009 -0.008 -0.051 -0.051 -0.05 -0.05 -0.049 -0.05 -0.05 -0.049 Observations 4837 4837 4837 4837 4837 4837 4837 4837 Number of banks 230 230 230 230 230 230 230 230 Adjusted R-squared 0.056 0.056 0.059 0.056 0.056 0.056 0.055 0.056
Robustness Tests
(1) RWATA (2) NPATA All Banks Small Banks Large Banks 2001-2006 All Banks
Securitization -0.004 -0.003 -0.015 -0.0036 -0.0002 (0.001)*** (0.0007)* -0.011 (0.0010)* (0.0001)** Size 0.006 0.0041 0.0288 0.0076 0.001 (0.004)* -0.0035 (0.0089)* (0.0043)*** (0.0003)* Loan -0.121 -0.1297 -0.0928 -0.135 0.0019 (0.017)*** (0.0163)* (0.0277)* (0.0171)* -0.0015 Capital -0.012 0.0214 -0.4945 0.0183 -0.005 -0.07 -0.069 (0.1351)* -0.0821 -0.0049 ROA -0.028 -0.0857 0.4177 -0.0122 -0.0443 -0.076 -0.0683 -0.5776 -0.0882 -0.03 Charge-Off -0.152 -0.1032 -0.281 -0.1143 -0.01 -0.092 -0.0892 -0.4573 -0.1032 -0.0164 GDPG 0.0000 0.0000 0.0010 0.0003 -0.0001 0.0000 -0.0004 -0.0011 -0.0004 (0.0000)* Constant -0.009 0.0333 -0.4529 -0.0227 -0.0143 -0.055 -0.0492 (0.1571)* -0.0608 (0.0046)* Observations 4837 3621 486 4271 4837 Number of banks 230 181 25 230 230 Adjusted R-squared 0.06 0.06 0.12 0.064 0.039
Discussion and Conclusions
The empirical results indicate a significant negative impact of securitization on bank credit risk taking, suggesting that banks with a greater amount of securitized assets outstanding choose asset portfolios of lower credit risk
Examining securitization by the type of assets securitized shows that the effect of securitization differs across different asset classes
We explain these findings by the recourse which issuing banks commonly provide, explicitly and/or implicitly, in securitization transactions
The magnitude of recourse required varies across securitizations depending on the nature of the underlying assets; this might explain the found variation in the effect of securitization on bank risk-taking behavior across asset classes
Discussion and Conclusions cont.
Taken as a whole, securitization activities are found to have a negative impact on the credit-risk taking behavior of banks
However, if the proposed recourse hypothesis is correct, the credit risk-reducing effect of securitization might be offset by banks’ greater risk arising from the securitized pool
Therefore, the net impact of securitization on the riskiness of issuing banks is ambiguous and will depend on the structure of transactions, in particular, on the magnitude of credit support provided by banks
This leads us to suggest that banks view securitization as a financing rather than a risk management mechanism
Thank you!
Appendix: Definition of Model Variables
Variable Definition Construction Expected Sign
CrR Bank credit risk Risk-Weighted Assets/Total Assets Dependent Variable
Sec Securitization activity of a bank Outstanding Securitized Assets/ Total Assets Negative
Size Size of a bank Ln (Total Assets) Positive
Loan Loan ratio of a bank Loans /Total Assets Negative
Cap Capital ratio of a bank Equity Capital/Total Assets Negative
ROA Return on assets Net Income/Total Assets Negative
ChOff Charge-off ratio of a bank Net Charge-Offs/Loans Negative
GDPG GDP growth GDP real growth rate