NPLs Securitizations, CDS Spreads and Spillover Effect: Evidence from the European Banking System

Abstract

Using an original bank-level dataset, we test the impact and the spillover effect of non-performing loans (NPLs) securitization announcements on the Credit Default Swap (CDS) spreads of EU banks. We construct a dataset that includes information about NPLs announcements and NPLs securitization characteristics. The final dataset contains 116 NPLs securitization announcements over the period 2012–2020. We find that the NPLs securitization is a credible mechanism for Global Systemically Important Institutions (G-SII) to engage in de-risking activities. The use of a State-backed guarantee reduces the cost of financing and the risk of the ceded loans is incorporated into the CDS spreads. Finally, we find evidence of a spillover effect after the announcement of an NPLs securitization by a G-SII bank. Our results show that the size of the spillover effect is influenced by the banks’ involvement in the NPLs market.

Enerji Belirsizliği ve Enerji Sektörü Getirileri İlişkisi

“…On the other hand, credit risk pertains to the potential loss faced by banks due to borrowers' failure to fulfill their repayment obligations. It encompasses the risk of non-payment or delayed payment of interest or principal on loans and credit instruments (Dell'Atti, Tommaso, & Pacelli, 2023).…”