Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations / Guenter Franke, Jan Pieter Krahnen.

Format:

Book

Author/Creator:

Franke, Guenter.

Contributor:

National Bureau of Economic Research.

Krahnen, Jan Pieter.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11741.

NBER working paper series no. w11741

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Default Risk Sharing Between Banks and Markets

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

This paper contributes to the economics of financial institutions risk management by exploring how loan securitization affects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to expand its loan business, thereby affecting systematic risk. For a sample of European CDO issues, we find an increase of the banks' betas, but no significant stock price effect around the announcement of a CDO issue.

Notes:

Print version record

November 2005.