Essays on Effects of Securitization on the Operation of Commercial Banks

資產證券化對商業銀行經營影響之研究

Student thesis: Doctoral Thesis

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Author(s)

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Detail(s)

Awarding Institution
Supervisors/Advisors
  • Kin Keung LAI (Supervisor)
  • Jichang Dong (External person) (External Supervisor)
Award date18 Aug 2017

Abstract

Traditionally, financial intermediaries originated loans that they then held on their balance sheets until maturity. This is no longer the case. Starting around 1990 pools of loans began to be sold in capital markets, by selling securities linked to pools of loans held by legal entities called “special purpose vehicles”(SPVs). These securities, known as asset-backed securities (ABS) (or mortgage-backed securities (MBS), in the case where the loans are mortgages) are claims to the cash flows from the pool of loans held by the SPV. Such securities can be issued with different seniorities, known as tranches. Securitization has fundamentally altered capital markets, the functioning of financial intermediation, and challenges many theories of the role of financial intermediaries.
Prior to the financial crisis of 2007-2008, securitization was a very large part of U.S. capital markets. It played a central role in the recent financial crisis. Yet it is largely unregulated and it is not well understood. There is little research on this topic. In this paper, we study some questions about securitization including comparative analysis of securitization, effect of bank asset securitization on banking financial performance, effect of securitization on banks’ liquidity and stability, adverse selection in securitization.
In fourth chapter, we make a comparative study of securitization in the U.S, Europe and Japan based on the following factors:process, product, operation patterns. We can find that the main motivation of issuance of asset securitization is to expedite the solution of liquidity shortage in the financial market. And the liquidity shortage in the United States and United Kingdom resulted from the expansion of residential mortgage loan while the reason in Japan resulted from the deterioration of financial condition of banks owing to the Asian financial crisis. The process of asset securitization market among countries is relative to the financial crisis respectively. At the same time, we can draw a conclusion that MBS, ABS and CDOs are the main products for each securitization market. Owing to the difference in some factors, such as background and process of securitization market, each market has its own specific securitization product, such as ABCP market in U.S., WBS and SME in Europe. And Compared to the U.S., the REITs market occupied the more market share in Japan, which contributed a lot to the process of real estate securitization. By comparing the operating mode of securitization among countries, we can find that the operating mode of securitization in U.S. is the basic mode of securitization, called off-balance sheet securitization while the operating mode in Europe is on-balance sheet securitization owing to the different legal system. In Europe, the underlying asset of bonds was just kept on the balance sheet. But in U.S, the underlying asset of bonds was just off the balance sheet, which realized the real true sale and bankruptcy remote. And in Europe, the investors have the right of resource while in U.S the investors’ right was supported by the underlying asset. In Europe, the interest rate of bond is fixed interest rate while in U.S the interest rate is floating rate. And the purpose of on-balance sheet financing is to solve the liquidity problem of banks while the purpose of off-balance sheet financing is to improve the regulation indicators of banks, such as capital adequacy ratio.
In fifth chapter, the data of banks in the U.S is used to study the effect of bank asset securitization on banks, which aims to reveal the influence that the securitization have on the operation of banks. It is revealed that the change of indicators including Loan-deposit Ratio, Interest, Capital Adequacy Ratio, Tier One Capital Adequacy Ratio, Return on Assets and Return on Equity can be resulted from the securitization. And the securitization can contribute to enhancing capital adequacy ratio, especially the core capital adequacy ratio, reducing the financial cost, enhancing the profitability and efficiency and optimizing the structure of loan portfolio. But there is no obvious evidence to reveal the function of reducing the liquidity risk. Based on the reserve granger causality test, the result reveals that financial indicators, such as Loan-deposit ratio, bad debt-expense ratio, interest, and return on Assets can cause the change of securitization. The banks will expand the size of securitization to induce the liquidity risk and enhance probability under the condition of improvement of liquidity risk, accumulation of bad debt, and increase of financial cost, which is the main motivation for banks engaged in securitization.
In sixth chapter, we propose a hypothesis that the securitization can improve the liquidity of bank asset and study the effect of securitization on banks’ liquidity and stability. We can find that securitization can reduce the ratio of current asset on the balance sheet. The higher the liquidity of loan portfolio is, the lower the ratio of current assets is. And the result can be found in the large banks. For small banks, the ability to securitized loan is weaker than that of large banks, which leads to the higher liquidity buffer. Compared to the large banks, securitization has greater effect on liquidity of small banks.
And securitization can contribute to banks’ stability. Banks can expand financing resources through securitization to reduce the ratio of current assets with higher holding cost, which can improve the profit of banks and increase the loan supply. And the securitization can reduce the sensitivity of loan supply to the external financing cost and reduce return volatility. During the financial crisis, the effect of securitization on large banks’ stability has not changed while the effect has changed for small banks.
In seventh chapter, we will apply the data from commercial banks to study adverse selection. By identifying the correlation between average default rate and securitized assets, we examine whether there exists adverse selection in the process of securitization. Based on the result, we find that average default rate for large banks have a positive correlation with total securitized assets while the correlation for middle banks is negative. For middle banks, average default rate will decrease with the expansion of securitization, which provides evidence for the existence of adverse selection. For small banks, average default rate has a negative correlation with securitized assets. But compared to the middle banks, the correlation did not continue for a long time, which means that small banks will select loans with poor quality to securitize in the process of securitization.
And adverse selection in securitization did not always exist. It is necessary for different banks to take different regulation measures. Especially for the small-medium banks, it is necessary to improve the information transparency of securitization. For small banks, the higher standard of information transparency may have a negative effect on the operation of banks. Based on the result that the average default rate has significant correlation with the securitized assets, there is a chance for banks to misreport t average default rate. It is necessary to pay attention to average default rate and adverse selection in the process of securitization to prevent the systematic risk.

    Research areas

  • securitization, Commercial banks, operation, effects