Arbitraging the Basel Securitization Framework: Evidence from German ABS Investment

Matthias Effing
Additional contact information
Matthias Effing: University of Geneva and Swiss Finance Institute

No 14-65, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper uses data about bond holdings of banks domiciled in Germany to analyze adverse selection in the structured debt market. Within a group of asset-backed securities (ABS) with the same Basel II risk weight, banks tend to buy the ABS with the highest yield spreads, the most inflated credit ratings, and the worst collateral. The effect is more pronounced for banks operating with capital adequacy ratios close to the regulatory minimum requirement. The evidence suggests that regulatory arbitrage considerations influence the selection of ABS and that ratings inflation reinforces regulatory arbitrage as Basel II risk weights depend mechanically on credit ratings.

Keywords: Regulatory arbitrage; asset-backed securities; risk-taking; ratings inflation (search for similar items in EconPapers)
JEL-codes: G01 G21 G24 G28 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2014-11, Revised 2015-12
New Economics Papers: this item is included in nep-ban
References: Add references at CitEc
Citations:

Downloads: (external link)
http://ssrn.com/abstract=2527981 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1465

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().