Princeton University Library Catalog
- Author/Artist:
- Lu, Helen [Browse]
- Format:
- Senior thesis
- Language:
- English
- Advisor(s):
- Zaidi, Iqbal [Browse]
- Department:
- Princeton University. Department of Economics [Browse]
- Class year:
- 2013
- Description:
- 80 pages
- Restrictions note:
- Walk-in Access. This thesis can only be viewed on computer terminals at the Mudd Manuscript Library.
- Summary note:
- The securitization market has facilitated the process of converting illiquid
loans into liquid assets and credit risk transfer from the banking sector to various
groups of investors. This study investigates whether securitization leads to
higher or lower credit risk taking on the part of banks by expanding upon the
Casu et al. (2011) study. We use data from bank holding companies from 2002 to
2011 and find that banks that hold a greater amount of outstanding securitized
assets will choose portfolio investments of lower credit risk, which can be
attributed to the recourse often provided in securitization transactions that
potentially prompt banks to be more risk averse. However, we find that our
proxy for the financial crisis of 2008 has a positive connection with credit risk
taking. Therefore, we conclude that the relationship between securitization and
banks’ credit risk taking behavior is not consistent, and depends on factors such
as the amount of credit enhancement provided and banks’ goals for securitizing
their assets, which contribute to the growing policy proposals for reforms in the
securitization market moving forward. Additionally, we find there is a negative
relationship between our proxy for the European debt crisis and credit risk
taking, suggesting that potential spillovers from the euro zone credit events may
also induce banks to reduce the credit risk of their portfolios, which also prompts
policy discussion in the near future.
