The Impact of Skin in the Game on Bank Behavior in the Securitization Market

Hibbeln, Martin; Osterkamp, Werner

doi:10.2139/ssrn.3528090

Cited by 4 publications

(1 citation statement)

References 52 publications

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“…We obtain our data from ED, the first and so far only central repository for ABS loan- The proportion of observations which we have to drop in our data preparation process is very similar compared to the other little available studies that use data from ED (e.g., Ertan et al, 2017;Gaudêncio et al, 2019;Hibbeln and Osterkamp, 2020;Klein et al, 2021). The securitized loans in our sample were originated in Belgium, France, Germany, Italy, the Netherlands, Portugal, and Spain, representing almost all Eurozone countries active in SME loan securitizations (Association for Financial Markets in Europe, 2014).…”

Section: Data Source and Sample Selectionmentioning

confidence: 73%

Better Be Careful: The Replenishment of ABS Backed by SME Loans

Fenner¹,

Klein²,

Mössinger³

2021

SSRN Journal

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Research QuestionAsset-backed securities (ABS) allow banks to pool illiquid loans and sell them as marketable assets to investors. Contrary to the general opinion, securitized loan portfolios may change their composition after being separated from banks' balance sheets. For ABS backed by small-and medium-sized enterprise loans in particular, the reason is that the time to maturity of ABS is usually much longer than that of the underlying loans. Thus, banks need to reinvest the released capital arising from the borrowers' repayments and transfer further loans to the securitized loan portfolios after the transactions' closing. This is known as portfolio replenishment. The purpose of this paper is to reveal whether banks select loans of lower quality for portfolio replenishment than for initial securitization. ContributionWe rely on a comprehensive and very granular data set from the only central loan-level repository for ABS in Europe collected on behalf of the European Central Bank. This novel data set enables us to explore portfolio replenishment for the first time in the academic literature. Understanding banks' portfolio replenishment behavior is especially relevant because banks have a particularly wide scope of action after the transactions' closing: investors have already made their investment decision and credit rating agencies have assigned their security ratings, both resulting in less strict monitoring. ResultsFirst, we show that loans added to ABS portfolios after the transactions' closing perform worse than loans that are part of the initial portfolios. Second, we reveal that banks induce these performance differences since they seem to exploit their information advantage by deliberately adding low-quality loans. Third, this adverse behavior is mitigated if banks do not only securitize once and thus aim to build a good reputation as well as if transparency in the ABS market is increased. These findings provide guidance for policymakers on how securitization markets could be made more sustainable in the future. Nichttechnische ZusammenfassungFragestellung Asset-Backed Securities (ABS) ermöglichen es Banken, illiquide Kredite zu bündeln und sie als marktfähige Wertpapiere an Investoren zu verkaufen. Entgegen der allgemeinen Auffassung kann sich die Zusammensetzung der verbrieften Kreditportfolios während der Laufzeit der Wertpapiere ändern. Insbesondere bei ABS, die mit Krediten an kleine und mittlere Unternehmen besichert sind, ist dies darauf zurückzuführen, dass die Laufzeit der ABS in der Regel deutlich länger ist als die der zugrundeliegenden Kredite. Dementsprechend müssen Banken das freigesetzte Kapital aus den Rückzahlungen der Kreditnehmer reinvestieren und weitere Kredite in die verbrieften Portfolios nach Transaktionsbeginn übertragen. Dies wird als Wiederauffüllung der Portfolios bezeichnet. Ziel dieses Beitrags ist es herauszufinden, ob Banken für die Portfolioauffüllung Kredite von geringerer Qualität auswählen als bei der initialen Verbriefung. BeitragWir verwenden einen umfassenden und se...

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Section: Data Source and Sample Selectionmentioning

confidence: 73%

Better Be Careful: The Replenishment of ABS Backed by SME Loans

Fenner¹,

Klein²,

Mössinger³

2021

SSRN Journal

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Multidimensional skin in the game

Gürtler

Koch

2021

Journal of Mathematical Economics

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How Smart are Investors after the Subprime Mortgage Crisis? Evidence from the Securitization Market

Hibbeln

Osterkamp

2012

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Evidence from the Securitization Market AbstractTwo factors have proven to be strongly relevant for the subprime mortgage crisis. The first is the lack of screening incentives of originators, which had not been anticipated by investors.The second is that investors relied too much on credit ratings. We examine whether investors have learned from these shortcomings. On the basis of securitizations from 2010 and 2011, we find that investors require a significantly higher risk premium when there is a high degree of asymmetric information. The credit spreads of information sensitive tranches are significantly higher if originators do not retain a part of the securitization or if they choose vertical slice retention instead of retaining the equity tranche. Moreover, the relevance of credit ratings in comparison to other credit factors has significantly decreased. Apparently, investors mainly consider ratings to discriminate between information sensitive and information insensitive tranches, beyond that they rely on their own risk analysis. This suggests that investors have learned their lesson from the subprime mortgage crisis.

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The Impact of Skin in the Game on Bank Behavior in the Securitization Market

Cited by 4 publications

References 52 publications

Better Be Careful: The Replenishment of ABS Backed by SME Loans

Better Be Careful: The Replenishment of ABS Backed by SME Loans

Multidimensional skin in the game

How Smart are Investors after the Subprime Mortgage Crisis? Evidence from the Securitization Market

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