Does securitization escalate banks’ sensitivity to systemic risk?
ISSN: 1526-5943
Article publication date: 7 February 2020
Issue publication date: 20 March 2020
Abstract
Purpose
The purpose of this paper is to test empirically the impact of asset securitization and sale activities as well as the holdings of sub-prime related securitized products on the US bank holding companies’ (BHC) exposure to systemic risk.
Design/methodology/approach
This paper adopts a robust econometric method to estimate the conditional value-at-risk as a measure of BHCs' institutional sensitivity to market crushes. Using the data over the period of 2004-2016, the study also uses OLS with robust standard errors and panel estimation with random effects as two alternative estimation techniques to assess the impact of securitization activities on the sensitivity of BHCs to systemic risk.
Findings
Residential mortgage and other forms of securitization activities are positively related to an increase in the US BHCs' sensitivity to systemic distress. The significant cross effects of both securitized loans and holdings of securitized products play a crucial role in determining risks in financial sector.
Originality/value
This study contributes to the empirical literature on the effects of securitization on BHCs' risk exposures in several ways. First, the paper considers the complexity of the bank's risk profile; it focuses on BHCs' individual sensitivity to systemic distress and its dependence on the size of securitization and assets sold activities considering both supply and demand sides of securitization. Second, the time horizon under investigation sheds a light on the relationship between securitization and banks' risk exposures including the pre-crisis, crisis and post-crisis periods.
Keywords
Acknowledgements
The author would like to thank anonymous referee for providing insightful comments and suggestions.
Citation
Ivanov, K. and Jiang, J. (2020), "Does securitization escalate banks’ sensitivity to systemic risk?", Journal of Risk Finance, Vol. 21 No. 1, pp. 1-22. https://doi.org/10.1108/JRF-12-2018-0184
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited