The Impact of Securitization on Bank’s Credit Risk Taking Behavior

This research studies the impact of securitization on the credit risk-taking behaviour of banks. Using a sample of the 100 largest U.S. banks over the period 2001 to 2010, we find that when use risk weighted asset to total asset ratio as a credit risk measurement, there is a positive relationship between securitization and bank’s credit risk taking behaviour. However, when use non-performing asset to total asset ratio as a credit risk measurement, we find a negative relationship between securitization and bank’s credit risk taking, and both findings are statistically significant for period 2001 to 2007. After we decompose the aggregate securitization, we find that various underlying assets have mixed effects of the overall impact of securitization on bank’s credit risk taking behaviour, with the Family Residential Loans tend to always contribute the most to the aggregate securitization’s impact. In sum, we conclude that the impact is ambiguous and the relationship will depend on the economic conditions.