Why Did U.S. Banks Invest in Highly-Rated Securitization Tranches?

Isil Erel, Taylor Nadauld and René Stulz
Additional contact information
Isil Erel: OH State University
Taylor Nadauld: Brigham Young University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We estimate holdings of highly-rated tranches of mortgage securitizations of American deposit-taking banks ahead of the credit crisis and evaluate hypotheses that have been advanced to explain these holdings. We find that holdings of highly-rated tranches were economically trivial for the typical bank, but banks with greater holdings performed more poorly during the crisis. Though univariate comparisons show that banks with large trading books had greater holdings, the holdings of highly-rated tranches are not higher for banks with large trading books in regressions that control for bank size. The ratio of highly-rated tranches holdings to assets increases with bank assets, but not for banks with more than $50 billion of assets. This evidence is inconsistent with explanations for holdings of highly-rated tranches that emphasize the incentives of banks deemed "too-big-to-fail". Further, the evidence does not provide support for "bad incentives" theories of holdings of highly-rated tranches. We find, however, that banks active in securitization held more highly-rated tranches. Such a result can be consistent with regulatory arbitrage as well as with securitizing banks holding highly-rated tranches to convince investors of the quality of these securities. Our evidence supports the latter hypothesis.

Date: 2011-07
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://fisher.osu.edu/supplements/10/10471/2011-16.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://fisher.osu.edu/supplements/10/10471/2011-16.pdf [301 Moved Permanently]--> https://fisher.osu.edu/supplements/10/10471/2011-16.pdf)

Related works:
Working Paper: Why Did U.S. Banks Invest in Highly-Rated Securitization Tranches? (2011)
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:ecl:ohidic:2011-16

Access Statistics for this paper

More papers in Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().