Does securitization reduce credit risk taking? Empirical evidence from US bank holding companies

This study investigates the impact of securitization on the credit risk-taking behavior of banks. Using US Bank Holding Company data from 2001 to 2007, we find that banks with a greater balance of outstanding securitized assets choose asset portfolios of lower credit risks. Examining securitizations by the type of underlying assets, we find that the negative relationship between outstanding securitization and risk taking is primarily driven by securitizations of mortgages, home equity lines of credit, and other consumer loans. Securitizations of all other types of assets, on the other hand, seem to have no significant impact on bank credit risk-taking behavior. We attribute these results to the recourse commonly provided in securitization transactions, as it might alter the risk-taking appetite of the issuing banks across asset classes. Therefore, we conclude that the net impact of securitization on the risk-taking behavior of issuing banks, and consequently on the soundness of the banking system, is ambiguous and will depend on the transactions structure. In particular, it will depend on the relative magnitude of credit support provided by banks. This leads us to suggest that banks have typically viewed securitization as a financing rather than a risk management mechanism.