Why Do UK Banks Securitize?

Abstract

The eight years from 2000 to 2008 saw a rapid growth in the use of securitization by UK banks. We aim to identify the reasons that contributed to this rapid growth. The time period (2000 to 2010) covered by our study is noteworthy as it covers the pre-…nancial crisis creditboom, the peak of the …nancial crisis and its aftermath. In the wake of the …nancial crisis, many governments, regulators and political commentators have pointed an accusing …nger at the securitization market -even in the absence of a detailed statistical and economic analysis.We contribute to the extant literature by performing such an analysis on UK banks, focussing principally on whether it is the need for liquidity (i.e. the funding of their balance sheets), or the desire to engage in regulatory capital arbitrage or the need for credit risk transfer that has led to UK banks securitizing their assets.We show that securitization has been signi…cantly driven by liquidity reasons. In addition, we observe a positive link between securitization and banks' credit risk. We interpret these latter …ndings as evidence that UK banks which engaged in securitization did so, in part, to transfer credit risk and that, in comparison to UK banks which did not use securitization, they had more credit risk to transfer in the sense that they originated lower quality loans and held lower quality assets. We show that banks which issued more asset-backed securities before the …nancial crisis su¤ered more defaults after the …nancial crisis.JEL Classi…cation: G21, G28Acknowledgement 1 We are grateful to Jo Danbolt and Hong Liu for comments. The usual disclaimer applies

Securitization: A Financing Vehicle for All Seasons?

“…In a US based study, (Uzun and Webb, 2007) find that bank size is an important determinant of whether a bank will securitize. (Cerrato et. al, 2012) utilize a sample of UK banks and find that the need to securitize tends to be driven by the search for liquidity, followed by regulatory arbitrage and credit risk transfer.…”

“…However, there are potential drawbacks associated with the securitization process (Schwarcz, 1991(Schwarcz, , 2009Cerrato et al, 2012). It is the credit ratings process that has come in for much criticism in the aftermath of the financial crisis (Scalet and Kelly, 2012).…”

A Model of Endogenous Loan Quality and the Collapse of the Shadow Banking System

“…Even if it is difficult to disentangle empirically the relative importance of each of the two motives, there is some relevant evidence in favor of financial innovation as a key factor behind shadow banking. For example, support for the notion of securitization as a tool to increase the efficiency of risk sharing and liquidity transformation, rather than regulatory arbitrage, can be found in Minton, Sanders, and Strahan (2004) for the United States, Bannier and Hansel (2008) for Europe, and Cerrato et al (2012) for the United Kingdom. Another common finding of these papers, related to one of the main results of this model, is that banks more involved in securitization tend to originate lower quality loans.…”

Insider perspectives on European banking challenges in the post-crisis regulation environment

“…37 Research carried out in UK banks has shown that a positive link exists between securitisation and bank credit risk where securitisation has been significantly driven by: i) the search for liquidity funding and ii) regulatory capital arbitrage and credit risk transfer. 38 It is to regulators' credit to attempt and modify/influence bank behaviour towards the 'appropriate' direction through steering banks to re-think and de-leverage their business models. That is, banks will have to amend their business models considerably before they are in a position to originate assets that are fully viable and designated for use as safe collateral.…”