Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations

Günter Franke () and Jan Krahnen ()

No 11741, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper contributes to the economics of financial institutions risk management by exploring how loan securitization affects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to expand its loan business, thereby affecting systematic risk. For a sample of European CDO issues, we find an increase of the banks' betas, but no significant stock price effect around the announcement of a CDO issue.

JEL-codes: D74 D82 G21 (search for similar items in EconPapers)
Date: 2005-11
New Economics Papers: this item is included in nep-bec, nep-fin, nep-fmk and nep-rmg
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

Published as Carey, Mark, and Rene M. Stulz. A National Bureau of Economic Research Conference Report. Chicago and London: University of Chicago Press, 2006.
Published as Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations , Gunter Franke, Jan Pieter Krahnen. in The Risks of Financial Institutions , Carey and Stulz. 2006

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Chapter: Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations (2007)
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