Effects of Securitization on Credit Risk and Banking Stability: Empirical Evidence from American Commercial Banks

Abstract

This study investigates the impact of securitization on risk behavior and banking stability. Based on a sample of 174 US commercial banks from 2001 to 2008, we find that a greater recourse to securitization is associated with a deterioration in the quality of American banks’ loan portfolios and an increase of the credit risk in their balance sheets. In the other hand, we observe a positive and significant impact of securitization on banking stability. We think that this paradox is due to the fact that different classes of securitized assets lead to heterogeneous effects on American banks’ stabilities. Particularly, our results show that mortgage securitization has a positive and significant impact on banking stability, providing thus a support to the implicit recourse hypothesis. Inversely, non mortgage securitization has a negative effect on banking stability because of the reduction of banks’ monitoring incentives related to this particular form of securitization.

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