Disentangling the Impact of Securitization on Bank Profitability

Abstract

We empirically evaluate the channels through which securitization impacts bank profitability. To this end, we analyze the role played by bank risk, cost of funding, liquidity and regulatory capital in explaining the relationship between securitization and bank profitability. We find that securitization activities tend to boost profitability. We also show that bank risk, cost of funding, liquidity and regulatory capital individually and jointly act as transmission channels in the securitization-profitability relationship. In addition, we break down the securitization effects on bank profitability into direct and indirect effects and identify the contribution of each individual transmission channel in the overall impact on bank profitability. Our findings have several implications for banks, financial markets, and regulators.

Is there a nonlinear relationship between nonperforming loans and bank profitability? Evidence from dynamic panel threshold

“…Moreover, an important determinant of bank profitability is nonperforming loans. The literature in this regard adopts several terms such as credit risk, nonperforming loans, loan loss provision, and risk‐weighted assets (Adelopo et al, 2018; Azad, Azmat, & Hayat, 2020; Bakoush, Abouarab, & Wolfe, 2019; Campmas, 2020; Dietrich & Wanzenried, 2014; Martins, Serra, & Stevenson, 2019; Pessarossi, Thevenon, & Weill, 2020; Petria et al, 2015; Salike & Ao, 2017; Le, Tzeremes, & Ngo, 2020; Ünvan & Yakubu, 2020). While extant literature has documented a negative effect of nonperforming loans on bank profitability, an issue yet to be resolved in the literature is the threshold level of nonperforming loans required for ensuring adequate profitability in the banking industry without trading off stability.…”