Asset securitisation and EU bank credit risk behaviour: a stakeholder theory perspective

Abstract

This study aims to investigate the effectiveness of using asset securitisation as risk management technique in banks. This study examines the direct impacts of asset securitisation on the riskiness of banks’ loan portfolios as well as the indirect impacts on the subsequent financial stability. This study also tests the changes in banks’ equity capital and liquidity as a result of using asset securitisation in order to understand their potential contributions to the examined bank risk behaviour. Furthermore, this study tests the impacts of adopting the Basel capital requirements on banks’ exposure to asset securitisation and the related bank risk behaviour. The study is informed by stakeholder theory. The use of stakeholder theory in the current study helps in addressing the causal connections between banks’ risk management practices and the achievement of banks’ performance objectives. Using stakeholder theory also helps understand the role of external regulatory structures in supporting risk management practices in banks. The empirical study is conducted by using a sample of 44 bank holding companies selected from 13 European countries during the period 2004-2014. The choice of the sample banks is based on the availability of securitisation data as well as the condition that all European banks should have placed at least one securitisation transaction during the period of the study. Moreover, seven linear regression models were developed to examine the study relationships and were estimated by using Fixed Effects panel data analysis. The use of panel data analysis in this study aims to capture the dynamics of bank risk behaviour and other bank-specific conditions that are associated with asset securitisation during the period of the study. The results found in the empirical analysis confirm that incorporating the use of asset securitisation with higher capital requirements is more likely to reduce originators’ credit risk-taking that arise from their lending activities. The findings reported in this study, however, do not support the regulatory capital arbitrage hypothesis of the securitisation products. Furthermore, this study confirms that European securitising banks continued to view asset securitisation as cost-efficient funding source, despite the decreasing number of transactions since the crisis. The findings in this study also show that European securitising banks did not effectively operate their securitisation proceeds in profitable investments during the period of the study. Based on the results found in the current study, we can suggest that introducing more risk-sensitive capital requirements is a key factor in the future development of the asset securitisation markets. This study contributes to the existing literature by emphasising the direct connections between asset securitisation and the riskiness of banks’ loan portfolios. This study also is one of the first studies to test asset securitisation effects on the absolute level of bank capital in order to provide a better understanding of the regulatory capital arbitrage hypothesis. The current study further extends the existing literature to test the role of the Basel capital requirements in controlling the use of asset securitisation in banks, taking into account the former regulatory frameworks and the full implementation years of the Basel (II) framework. Unlike previous studies, the employment of stakeholder theory in the current study has helped in expanding the perception of risk management in banks, from purely controlling device to a broad approach that aims to support bank’s existence and prosperity. Furthermore, this study is one of the first studies that had a broader look at the European securitisation market, during the years before and after the crisis and compared the empirical results of both sub-samples to validate the robustness of the study findings in terms of the financial crisis.