Securitization without risk transfer

Abstract

We analyze asset-backed commercial paper conduits which played a central role in the early phase of the financial crisis of 2007-09. We document that commercial banks set up conduits to securitize assets while insuring the newly securitized assets using credit guarantees. The credit guarantees were structured to reduce bank capital requirements, while providing recourse to bank balance sheets for outside investors. Consistent with such recourse, we find that banks with more exposure to conduits had lower stock returns at the start of the financial crisis; that during the first year of the crisis, asset-backed commercial paper spreads increased and issuance fell, especially for conduits with weaker credit guarantees and riskier banks; and that losses from conduits mostly remained with banks rather than outside investors. These results suggest that banks used this form of securitization to concentrate, rather than disperse, financial risks in the banking sector while reducing their capital requirements.

The Mortgage and Financial Crises: The Role of Credit Risk Management and Corporate Governance

“…In the words of John Mack of Morgan Stanley, "We did eat our own cooking, and we choked on it." 13 Acharya and Schnabl (2009) also find that banks that were more exposed to these conduits had lower stock returns and greater widening of credit default swap spreads around the August 2007 crisisconsistent with the risk-taking motive in securitization. In addition to plain vanilla securitization, large financial organizations engaged in other types of securitization, such as ABCP programs and structured investment vehicles (SIVs).…”

“…Acharya and Schnabl (2009) suggest that these types of securitizations did not transfer credit risk to outside investors but were often used as a sophisticated form of performing "carry trades"-a form of regulatory capital arbitrage that allowed financial firms to take on exposure to tail risks that were systemic in nature with low regulatory capital requirements. In the words of John Mack of Morgan Stanley, "We did eat our own cooking, and we choked on it."…”

Stricter microprudential supervision versus macroprudential supervision

“…Acharya et al (2011, p. 21) observe that relative to other financial institutions that "Fannie and Freddie were afforded extraordinarily light capital requirements". Acharya et al (2013) analyze the risk posed by mortgage conduits, such as structured investment vehicles. Ashcraft et al (2010) for evidence that overstated credit ratings played an important role in mortgage securitization.…”

Can the Pragmatic East Asian Approach to Human Security Offer a Way for the Deepening of the Long Peace of East Asia?

“…The original ideas of the securitization theory [6] have been criticized in the East Asian debate for their lack of empirical focus, for the disinterest in real policy consequences and the unintended effects of securitization [7][8][9].…”