Capital Incentives and Adequacy for Securitizations

by Daniel Rösch of Leibniz University of Hannover, and
Harald Scheule of University of Technology, Sydney

June 2011

Abstract: This paper analyzes the capital incentives and adequacy of financial institutions for asset portfolio securitizations. The empirical analysis is based on US securitization rating and impairment data. The paper finds that regulatory capital rules for securitizations may be insufficient to cover implied losses during economic downturns such as the Global Financial Crisis. In addition, the rating process of securitizations provides capital arbitrage incentives for financial institutions and may further reduce regulatory capital requirements. These policy-relevant findings assume that the ratings assigned by rating agencies are correct and can be used to build a test for the ability of Basel capital regulations to cover downturn losses.

JEL Classification: G20, G28, C51.

Keywords: Bank capital, Financial crisis, Rating, Securitization.

Published in: Journal of Banking & Finance, Vol. 36, No. 3, (March 2012), pp. 733-748.

Previously titled: Securitization Rating Performance and Agency Incentives --and before that-- Rating Performance and Agency Incentives of Structured Finance Transactions

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