Author
Abstract
Using US BHC data for the period from 2004 to 2016, this paper examines the relationship between different forms of credit enhancement and bank contribution to systemic crashes. The findings demonstrate that the overall level of contractual retained interests and guarantees offered to own securitization structures poses a significant threat to financial system stability, although this varies for different types of the underlying assets as well as subordinated structure of interest retention. The amount of credit exposure arising from credit enhancements increases BHCs’ contribution to market crashes, while ownership interest in loans and obligations to provide funding do not seem to affect the level of risk BHCs inject into the system. Recourse credit enhancement in mortgage and consumer securitizations is a significant determinant of systemic risks injected by banks into the market with the former one having the strongest economic impact. The implicit credit enhancement in commercial loans tends to decrease systemic risk contribution. The results are not driven by the level of securitization activities, although the economic effect is stronger for large securitizers. The findings have direct implications for the most recent changes in legislation requiring originating banks to retain a material portion of credit risks of securitized loans through retained interests mechanisms.
Suggested Citation
Katerina Ivanov, 2022.
"Credit enhancement mechanism in loan securitization and its implication to systemic risk,"
Review of Financial Economics, John Wiley & Sons, vol. 40(4), pages 418-437, October.
Handle:
RePEc:wly:revfec:v:40:y:2022:i:4:p:418-437
DOI: 10.1002/rfe.1155
Download full text from publisher
Corrections
All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:40:y:2022:i:4:p:418-437. See general information about how to correct material in RePEc.
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
We have no bibliographic references for this item. You can help adding them by using this form .
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .
Please note that corrections may take a couple of weeks to filter through
the various RePEc services.