Arbitraging the Basel securitization framework: Evidence from German ABS investment

Matthias Efing

No 22, ESRB Working Paper Series from European Systemic Risk Board

Abstract: This paper provides evidence for regulatory arbitrage within the class of asset-backed securities (ABS) based on individual asset holding data of German banks. I find that banks operating with tight regulatory constraints exploit the low risk-sensitivity of rating-contingent capital requirements for ABS. Unlike unconstrained banks they systematically pick the securities with the highest yield and the lowest collateral performance among ABS with the same regulatory risk weight. This reaching for yield allows constrained banks to increase the return on the capital required for an ABS investment by a factor of four. JEL Classification: G01, G21, G24, G28

Keywords: asset-backed securities; credit ratings; reaching for yield; regulatory arbitrage (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Arbitraging the Basel securitization framework: Evidence from German ABS investment (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:201622

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