Default risk sharing between banks and markets: the contribution of collateralized debt obligations

Günter Franke () and Jan Pieter Krahnen ()
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Günter Franke: Department of Economics, University of Konstanz

No 05-04, CoFE Discussion Paper from Center of Finance and Econometrics, University of Konstanz

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: D82 G21 D74 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn, nep-fmk and nep-rmg
Date: Written 2005-08-18
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http://cofe.uni-konstanz.de/Papers/dp05_04.pdf (application/pdf)

Related works:
Working Paper: Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations (2005)
Working Paper: Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations (2005)
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