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Do Financial Regulations Shape the Functioning of Financial Institutions’ Risk Management in Asset-Backed Securities Investment?

Author

Listed:
  • Xuanjuan Chen
  • Eric Higgins
  • Han Xia
  • Hong Zou
  • Wei Jiang

Abstract

We show that installing stronger risk management into financial institutions—a proposal widely discussed following the 2008 financial crisis—is insufficient to constrain institutions’ exposure to investment with lurking risk, such as asset-backed securities (ABS). Regulations affect the functioning of risk management: risk management constrains institutions’ exposure to risky ABS when they face mark-to-market reporting combined with capital requirements; however, this role is considerably weaker when capital requirements are combined with historical cost accounting. We find suggestive evidence that financial regulations affect risk management functions through promoting risk managers’ efforts in uncovering ABS risk and curbing executives’ incentives to take excessive risk.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Xuanjuan Chen & Eric Higgins & Han Xia & Hong Zou & Wei Jiang, 2020. "Do Financial Regulations Shape the Functioning of Financial Institutions’ Risk Management in Asset-Backed Securities Investment?," The Review of Financial Studies, Society for Financial Studies, vol. 33(6), pages 2506-2553.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:6:p:2506-2553.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz067
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    Cited by:

    1. Thiemo Fetzer & Benjamin Guin & Felipe Netto & Farzad Saidi, 2024. "Insurers Monitor Shocks to Collateral: Micro Evidence from Mortgage-Backed Securities," CESifo Working Paper Series 11324, CESifo.
    2. Martin Hibbeln & Werner Osterkamp, 2024. "Simple is simply not enough—features versus labels of complex financial securities," Review of Derivatives Research, Springer, vol. 27(2), pages 113-150, July.
    3. Xiaoyi Li & Yung-Ming Shiu, 2021. "Reinsurance, debt capacity and financial flexibility," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(4), pages 664-687, October.
    4. Harold H. Zhang & Feng Zhao & Xiaofei Zhao, 2024. "Neglected Risks in the Communication of Residential Mortgage‐Backed Securities Offerings," Journal of Finance, American Finance Association, vol. 79(1), pages 129-172, February.

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