Securitization, bank behaviour and financial stability

A systematic review of the recent empirical literature

Solomon Y. Deku, Alper Kara, Yifan Zhou

Research output: Contribution to journalArticle

Abstract

We systematically review the recent empirical literature to investigate whether and how securitization influences bank behaviour and its implication on financial stability. We find that, in the years preceding the 2007-2009 financial crisis, banks with higher credit and market risk were more likely to securitize assets. Banks became riskier and increased systemic risk as they took advantage of securitization in order to obtain capital relief. There is robust evidence indicating that mortgage securitization led to a deterioration in bank lending standards via weaker screening, lower denial rates, and misreporting of credit quality. For corporate loans securitization, literature’s findings on lax bank lending are inconclusive. However, it is evident that securitization resulted in poorer ex-post bank monitoring of corporate borrowers. Even though Europe is the second largest securitization market, there is a dearth of evidence on the impact of securitization on European banks’ lending behaviour. Research is also very limited on the post-crisis regulatory incentive aligning mechanisms such as the risk retention requirements and the credit ratings reform. Finally, evidence on securitisation activity in emerging markets, such as Latin America and China, where securitization volumes have been increasing recently, is relatively non-existent.
Original languageEnglish
Pages (from-to)245-254
Number of pages10
JournalInternational Review of Financial Analysis
Volume61
Early online date30 Nov 2018
DOIs
Publication statusPublished - Jan 2019

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Systematic review
Financial stability
Securitization
Bank lending
Market risk
Assets
Credit
Screening
China
European banks
Incentive mechanism
Mortgages
Loans
Latin America
Emerging markets
Bank monitoring
Financial crisis
Credit risk
Credit rating
Deterioration

Cite this

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Securitization, bank behaviour and financial stability : A systematic review of the recent empirical literature. / Deku, Solomon Y.; Kara, Alper; Zhou, Yifan.

In: International Review of Financial Analysis, Vol. 61, 01.2019, p. 245-254.

Research output: Contribution to journalArticle

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