Why do UK banks securitize?

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Social science research network
Abstract
The eight years from 2000 to 2008 saw a rapid growth in the use of securitization by UK banks. We aim to identify the reasons that contributed to this rapid growth. The time period (2000 to 2010) covered by our study is noteworthy as it covers the pre-financial crisis credit- boom, the peak of the financial crisis and its aftermath. In the wake of the financial crisis, many governments, regulators and political commentators have pointed an accusing finger at the securitization market - even in the absence of a detailed statistical and economic analysis. We contribute to the extant literature by performing such an analysis on UK banks, fo- cussing principally on whether it is the need for liquidity (i.e. the funding of their balance sheets), or the desire to engage in regulatory capital arbitrage or the need for credit risk trans- fer that has led to UK banks securitizing their assets. We show that securitization has been significantly driven by liquidity reasons. In addition, we observe a positive link between securitization and banks credit risk. We interpret these latter findings as evidence that UK banks which engaged in securitization did so, in part, to transfer credit risk and that, in comparison to UK banks which did not use securitization, they had more credit risk to transfer in the sense that they originated lower quality loans and held lower quality assets. We show that banks which issued more asset-backed securities before the financial crisis suffered more defaults after the financial crisis.
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Working paper series
The eight years from 2000 to 2008 saw a rapid growth in the use of securitization by UK banks. We aim to identify the reasons that contributed to this rapid growth. The time period (2000 to 2010) covered by our study is noteworthy as it covers the pre- nancial crisis credit- boom, the peak of the nancial crisis and its aftermath. In the wake of the nancial crisis, many governments, regulators and political commentators have pointed an accusing nger at the securitization market - even in the absence of a detailed statistical and economic analysis. We contribute to the extant literature by performing such an analysis on UK banks, fo- cussing principally on whether it is the need for liquidity (i.e. the funding of their balance sheets), or the desire to engage in regulatory capital arbitrage or the need for credit risk trans- fer that has led to UK banks securitizing their assets. We show that securitization has been signi cantly driven by liquidity reasons. In addition, we observe a positive link between securitization and banks credit risk. We interpret these latter ndings as evidence that UK banks which engaged in securitization did so, in part, to transfer credit risk and that, in comparison to UK banks which did not use securitization, they had more credit risk to transfer in the sense that they originated lower quality loans and held lower quality assets. We show that banks which issued more asset-backed securities before the nancial crisis su¤ered more defaults after the nancial crisis.
Keywords
Banking, securitization, UK
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