Reaching for Yield in the ABS Market: Evidence from German Bank Investments. (22nd August 2019)

• Record Type: Journal Article
• Authors: Efing, Matthias
• Is Part Of: Review of finance. Volume 24:Number 4(2020)
• Page Start: 929
• Page End: 959
• Publication Date: 2019-08-22
• Subjects: G01 -- G21 -- G24 -- G28; Reaching for yield -- Securitization -- Credit ratings -- Financial regulation; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfz013
• Languages: English
• ISSNs: 1572-3097

Abstract

Abstract: If regulation fails to differentiate between priced and idiosyncratic risk, it incentivizes investors to reach for yield. Studying securitization exposures on the balance sheets of German banks, I show evidence consistent with this prediction. Banks with tight regulatory constraints (low capital adequacy ratios) invest more in higher yielding ABSs conditionally on rating-implied regulatory risk weights. ABS investments of constrained banks tend to perform worse ex post in terms of collateral delinquency and lose value. Differences in bank sophistication, market power, or incentives to retain securitizations are unlikely to explain the riskier ABS investments of constrained banks.