Why Did Holdings of Highly-Rated Securitization Tranches Differ So Much across Banks?

Isil Erel, Taylor Nadauld and René Stulz
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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 provide estimates of holdings of highly-rated securitization tranches of American bank holding companies ahead of the credit crisis and evaluate hypotheses that have been advanced to explain these holdings. Our broadest estimates include CDOs as well as holdings in off-balance-sheet conduits. While holdings exceeded Tier 1 capital for some large banks, they were economically trivial for the typical U.S. bank. The banks with high holdings were not riskier before the crisis using conventional measures, but their performance was poorer during the crisis. We find that holdings of highly-rated tranches are explained by a bank's securitization activity. Theories of highly-rated tranches that are unrelated to a bank's securitization activity, such as "bad incentives," "bad governance," or "bad risk management" theories, have no support in the data.

JEL-codes: G01 G21 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-ban
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Journal Article: Why Did Holdings of Highly Rated Securitization Tranches Differ So Much across Banks? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2012-27

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