Abstract
Original language | English |
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Pages (from-to) | 1391-1398 |
Journal | Journal of Banking and Finance |
Volume | 35 |
Issue number | 6 |
DOIs | |
Publication status | Published - 2011 |
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Keywords
- securitization
- credit derivatives
- systemic risk
- subprime crisis
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Credit risk transfer activities and systemic risk : How banks became less risky individually but posed greater risks to the financial system at the same time. / Wagner, W.B.; Nijskens, R.G.M.
In: Journal of Banking and Finance, Vol. 35, No. 6, 2011, p. 1391-1398.Research output: Contribution to journal › Article › Scientific › peer-review
TY - JOUR
T1 - Credit risk transfer activities and systemic risk
T2 - How banks became less risky individually but posed greater risks to the financial system at the same time
AU - Wagner, W.B.
AU - Nijskens, R.G.M.
PY - 2011
Y1 - 2011
N2 - A main cause of the crisis of 2007–2009 is the various ways through which banks have transferred credit risk in the financial system. We study the systematic risk of banks before the crisis, using two samples of banks respectively trading Credit Default Swaps (CDS) and issuing Collateralized Loan Obligations (CLOs). After their first usage of either risk transfer method, the share price beta of these banks increases significantly. This suggests the market anticipated the risks arising from these methods, long before the crisis. We additionally separate this beta effect into a volatility and a market correlation component. Quite strikingly, this decomposition shows that the increase in the beta is solely due to an increase in banks’ correlations. Thus, while banks may have shed their individual credit risk, they actually posed greater systemic risk. This creates a challenge for financial regulation, which has typically focused on individual institutions.
AB - A main cause of the crisis of 2007–2009 is the various ways through which banks have transferred credit risk in the financial system. We study the systematic risk of banks before the crisis, using two samples of banks respectively trading Credit Default Swaps (CDS) and issuing Collateralized Loan Obligations (CLOs). After their first usage of either risk transfer method, the share price beta of these banks increases significantly. This suggests the market anticipated the risks arising from these methods, long before the crisis. We additionally separate this beta effect into a volatility and a market correlation component. Quite strikingly, this decomposition shows that the increase in the beta is solely due to an increase in banks’ correlations. Thus, while banks may have shed their individual credit risk, they actually posed greater systemic risk. This creates a challenge for financial regulation, which has typically focused on individual institutions.
KW - securitization
KW - credit derivatives
KW - systemic risk
KW - subprime crisis
U2 - 10.1016/j.jbankfin.2010.10.001
DO - 10.1016/j.jbankfin.2010.10.001
M3 - Article
VL - 35
SP - 1391
EP - 1398
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
IS - 6
ER -