Securitization, Covered Bonds and the Risk Taking Behavior of European Banks

Securitization, Covered Bonds and the Risk Taking Behavior of European Banks

Ahmed Arif, Laura Bottazzi, Sergio Pastorello

Series number :

Serial Number: 
828/2022

Date posted :

June 11 2022

Last revised :

June 11 2022
SSRN Share

Keywords

  • Securitization • 
  • Covered Bonds • 
  • credit risk • 
  • European Banks • 
  • Risk Retention • 
  • Propensity Score Methods

This study investigates the impact of securitization and the issuance of covered bonds on the credit risk taking behavior of banks. We collected data for seven major European economies for the period between 2001 and 2014, that is, both before and after the global financial crisis of 2008.

In this paper, we address self-selection concerns about the endogeneity of the decision to securitize or issue covered bonds by using the Covariance Balancing Propensity Score method. We inquire whether securitizing banks hold portfolios that contain riskier assets than those of banks that issue covered bonds and whether the risk taking behavior of banks changed after the recent financial crisis. Our results suggest that European banks typically view securitization as a financing rather than a risk management tool. Therefore, our findings do not support the conventional wisdom that the absence of skin in the game causes banks to assume more risk. Instead, we find evidence that securitizing banks have been opting for lower risk asset portfolios after the 2008 crisis.

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Authors

Real name:
Ahmed Arif
Real name:
Sergio Pastorello