Securitization, Covered Bonds and the Risk Taking Behavior of European Banks

Ahmed Arif, Laura Bottazzi and Sergio Pastorello

No 17355, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This study investigates the impact of securitization and the issuance of covered bonds on the credit risk taking behavior of banks. We collected data for seven major European economies for the period between 2001 and 2014, that is, both before and after the global financial crisis of 2008. In this paper. we address self-selection concerns about the endogeneity of the decision to securitize or issue covered bonds by using the Covariance Balancing Propensity Score method. We inquire whether securitizing banks hold portfolios that contain riskier assets than those of banks that issue covered bonds and whether the risk taking behavior of banks changed after the recent financial crisis. Our results suggest that European banks typically view securitization as a financing rather than a risk management tool. Therefore, our findings do not support the conventional wisdom that the absence of skin in the game causes banks to assume more risk. Instead, we find evidence that securitizing banks have been opting for lower risk asset portfolios after the 2008 crisis.

Keywords: Securitization; Credit risk; Covered bonds; European banks; Risk retention; Propensity score methods (search for similar items in EconPapers)
JEL-codes: G01 G21 G23 (search for similar items in EconPapers)
Date: 2022-06
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