Reaching for Yield in the ABS Market: Evidence from German Bank Investments*

Causes of the financial crisis

Matthias Efing

Review of Finance, 2020, vol. 24, issue 4, 929-959

Abstract: If regulation fails to differentiate between priced and idiosyncratic risk, it incentivizes investors to reach for yield. Studying securitization exposures on the balance sheets of German banks, I show evidence consistent with this prediction. Banks with tight regulatory constraints (low capital adequacy ratios) invest more in higher yielding ABSs conditionally on rating-implied regulatory risk weights. ABS investments of constrained banks tend to perform worse ex post in terms of collateral delinquency and lose value. Differences in bank sophistication, market power, or incentives to retain securitizations are unlikely to explain the riskier ABS investments of constrained banks.

Keywords: Reaching for yield; Securitization; Credit ratings; Financial regulation (search for similar items in EconPapers)
JEL-codes: G01 G21 G24 G28 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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