Three essays on securitisation

Sarkisyan, Anna (2011). Three essays on securitisation. (Unpublished Doctoral thesis, City University London)

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Securitisation has been viewed as a key bank funding, risk management and performance improvement tool over the last two decades. However, the financial crisis of 2007-2009 has shown that engagement in securitisation might create significant financial problems for banks and consequently lead to widespread problems in the financial sector. This, therefore, has underlined the importance of understanding banks’ securitisation activities, the benefits and risks inherent, and the consequences for the financial system.

This thesis comprises empirical research on the effects of securitisation on banks. The work is presented in three essays. The first essay investigates whether banks improve their performance through the use of the securitisation market by applying a propensity score matching approach. Specifically, we attempt to assess whether the access to the securitisation market led to lower cost of funding, less credit risk exposure, and higher profitability. Using US commercial bank data from 2001 to 2008, we first test these hypotheses using univariate analysis and find that securitising banks are, on average, more profitable institutions, with higher credit risk exposure, and higher cost of funding. However, the propensity score matching analysis does not provide evidence to suggest that securitisation had a significant impact upon bank performance. In other words, the analysis shows that securitisers would have had comparable cost of funding, credit risk, and profitability had they remained non-securitising. This evidence leads us to conclude that securitisation does not seem to outperform alternative funding, risk management, and profitability improvement techniques used by non-securitising banks that have ex-ante similar characteristics to those securitising.

The second essay investigates the impact of securitisation on the credit-risk taking behaviour of banks. Using US bank holding company data from 2001 to 2007, we find that banks with a greater balance of outstanding securitised assets choose asset portfolios of lower credit risk. Examining securitisations by the type of underlying assets, we find that the negative relationship between outstanding securitisation and risk taking is primarily driven by securitisations of mortgages, home equity lines of credit, and other consumer loans. Securitisations of all other types of assets, on the other hand, seem to have no significant impact on bank credit-risk taking behaviour. We attribute these results to the recourse commonly provided in securitisation transactions, as it might alter the risk-taking appetite of the issuing banks across asset classes. Therefore, we conclude that the net impact of securitisation on the riskiness of issuing banks, and consequently on the soundness of the banking system, is ambiguous and will depend on the structure of transactions. In particular, it will depend on the relative magnitude of credit support provided by banks.

The third essay examines the relationship between banks’ off-balance sheet securitisation structures and insolvency risk, with a particular focus on credit and liquidity support provided by these banks. Additionally, it examines the risk effect of credit-enhancing facilities and liquidity commitments provided by banks to securitisation structures of other institutions. Using US bank holding company data for the period from 2002 to 2007, we first find that credit enhancements provided by originating banks in their securitisation structures have a significant positive effect on insolvency risk of the banks. Second, examining credit enhancements by the form of underlying facility, we find that among credit-enhancing interest-only strips, subordinated securities, and standby letters of credit, the latter have the greatest positive association with bank insolvency risk. In contrast, liquidity provisions are found to have a significant risk-reducing effect. Finally, examining credit and liquidity support provided by banks to third-party securitisation structures, we find that credit enhancing third-party securitisations reduces insolvency risk of the banks, while liquidity provisions are found to be highly positively associated with their insolvency.

Summarising the main findings, the first essay finds no evidence of significant causal effects of securitisation on performance of securitising banks. The second essay finds evidence to suggest that outstanding securitisation has a negative impact on the credit-risk taking behaviour of banks; while the third essay finds that the interests retained by banks in connection to securitised assets significantly increase their insolvency risk. This shows that the net risk transfer for originating banks through securitisation might be ambiguous; however banks do account for the retained exposure to the securitised assets reducing credit risk taking. Taken together, the evidence from the three studies suggests that banks predominantly use securitisation for financing purposes rather than as a risk management or performance improvement mechanism.

This research contributes to a deeper understanding of the motives for and consequent implications of securitisation and provides valuable findings for the ongoing discussion of how to redesign the securitisation model and to reform the supervision and regulation of banks’ engagement in securitisation activities in response to the recent financial crisis.

Item Type: Thesis (Doctoral)
Additional Information: © 2011 Anna Sarkisyan
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
City University London PhD theses

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