Asset securitization, cross holdings, and systemic risk in banking

We present a theoretical framework for studying how the cross holdings of asset securitization products may affect systemic risk in banking. We demonstrate that cross holdings can be understood from the perspective of profit seeking and credit creation; these motives drive up banks’ leverage. We als...

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Bibliographic Details
Published in:Journal of financial stability 2023-08, Vol.67, p.101140, Article 101140
Main Authors: Xiao, Shuhua, Zhu, Shushang, Wu, Ying
Format: Article
Language:English
Subjects:
Asset securitization
Banking system
Cross holdings
Systemic risk
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Summary:We present a theoretical framework for studying how the cross holdings of asset securitization products may affect systemic risk in banking. We demonstrate that cross holdings can be understood from the perspective of profit seeking and credit creation; these motives drive up banks’ leverage. We also show that the capital adequacy ratio regulatory constraint may become invalid with cross holdings, which adversely impacts the monitoring of the stability of a system. We demonstrate that, generally, the impact of asset securitization on systemic risk is nonmonotonic and critically hinges on the banking asset structure, cross-holding degree among banks, and asset securitization characteristics including its state of risk retention. We empirically examine theoretical predictions using a comprehensive set of data from 27 countries/regions spanning the past 15 years. •Theoretically clarifies the motivation for banks to cross-hold securitization products.•Cross-holding behavior on securitization products can help banks avoid regulation.•Considering cross-holding behavior, the impact of securitization on systemic risk is non-monotonic.
ISSN:1572-3089
1878-0962
DOI:10.1016/j.jfs.2023.101140