The solvency of financial institutions in Spain: lessons from securitization

Abstract

On analysing a sample of Spanish banks, we find that securitization has a slightly negative impact on the soundness of the issuing entity. An unbalanced dynamic panel model was estimated using the forward orthogonal deviations GMM method and used to analyse 537 traditional securitizations issued by 61 banks between 1998 and 2012. The analysis revealed that the entities' soundness became weaker immediately prior to the crisis, but this effect became insignificant after 2007. Securitization has facilitated a process of regulatory capital arbitrage leading to lower capital requirements while, at the same time, giving rise to a slight worsening of the quality of the originators' portfolios. It was found that profitability, liquidity and inflation positively affect solvency, while changes in short-term interest rates affect it negatively.

Securitization and financial solvency: empirical evidence from Portugal

“…This result allows us to affirm that, as a consequence of securitization, there has been a process of regulatory capital requirement readjustment that has obliged entities to fulfil higher capital requirements. This process of regulatory capital readjustment runs counter to the findings of López-Andión et al (2015) in which the Spanish originators actually had lower regulatory capital requirements but, at the same time, there was a slight worsening of the quality of originator's portfolios. In this study securitization had a negative impact on the issuing entities' soundness.…”

“…Studies performed using panel data reach the conclusion that the growth in the bulk of risk transmitted has a negative impact on the quality of the entity's assets and hence for its financial soundness (Dionne and Harchaoui 2003;Michalak and Udhe 2012;Otero González et al 2016;López-Andión et al 2015). Nevertheless, other researchers present evidence suggesting that a reduction in financial soundness only takes place with the securitization of credit cards.…”

“…Of the 42 entities, only 35 were included in the estimations, since no data were available for any of the variables for the remaining 7 entities.4 FollowingMichalak and Udhe (2012) andLópez-Andión et al (2015) our model included: the rate of GDP growth, inflation, short term interest rates and the Herfindall Index; but neither was found to be significant. As a result we did not include these variables in the final model.…”

Market Perception of Bank Risk and Securitization in Spain

“…First, the analysis focuses on the Spanish market. In spite of the fact that the Spanish securitization market is highly significant, research has tended to centre on the factors that promote securitization (Cardone-Riportella et al 2010), on the effects of securitization on the issuing banks' share prices (Martínez-Solano et al 2009;López-Penabad et al 2015) or on the issuing banks' solvency (López-Andión et al 2015). There are no empirical studies that analyse how securitization influences systematic and systemic risk within the Spanish market, as will be seen in the following section.…”

Securitization, financial stability and effective risk retention. A European analysis

“…Moreover, they hypothesize that risk reduction by means of securitization is essentially determined by separating the issue into tranches. Another empirical studies, between others [31] and [32], show that credit risk securitization also has a negative impact on the issuing banks' financial soundness.…”