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Securitization, financial stability and effective risk retention. A European analysis
Ana Iglesias-Casal1, María-Celia López-Penabad2, Carmen López-Andión1
1Department of Quantitative Economics, Facultade de C. Económicas e Empresariais, Universidade de Santiago de Compostela, Santiago de Compostela, Spain.
Plos One
|February 4, 2020
Summary
Securitization increased European banks' systematic risk before 2007, particularly in peripheral nations and with mortgage-backed assets. Post-2007 securitizations showed no impact on bank financial stability.
Area of Science:
- Economics
- Financial Markets
- Banking Regulation
Background:
- Securitization, a financial practice involving the pooling of assets into securities, has been a significant component of European financial markets.
- Understanding the impact of securitization on bank financial stability is crucial, especially in light of past financial crises.
- The period 2000-2017 in Europe provides a unique setting to analyze securitization's effects before, during, and after the 2008 financial crisis.
Purpose of the Study:
- To investigate the relationship between securitization activities and the financial stability of European banks.
- To determine how securitization impacts banks' systematic and idiosyncratic risk.
- To analyze regional and collateral-type variations in the effects of securitization on bank risk.
Main Methods:
- Employs a novel event study methodology to assess the impact of securitization on bank risk.
- Analyzes data from European banks that issued securitizations between 2000 and 2017.
- Segments the sample by European regions (core vs. periphery) and collateral type (e.g., mortgage-backed).
Main Results:
- Securitization positively impacted European banks' systematic risk from 2000 to 2007, driven by increased systemic and idiosyncratic risk.
- Subsequent securitizations (post-2007) did not significantly affect systematic risk.
- The pre-crisis effect was concentrated in peripheral European countries and specifically linked to mortgage-based securitizations, with notable impacts in Spain and the UK.
Conclusions:
- Securitization posed a risk to European bank financial stability in the pre-crisis period, particularly for peripheral nations and mortgage-backed securities.
- The financial crisis of 2008 appears to have altered the risk profile associated with securitization for European banks.
- Policy and regulatory considerations regarding securitization, especially mortgage-backed, may be warranted, particularly for banks in economically sensitive regions.
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