When banks’ shadow fades and shadow banking rises : Securitization and loan performance in China
Gong, Di; Wu, Jin; Zhu, Jigao (15.09.2023)
Numero
4/2023Julkaisija
Bank of Finland
2023
Julkaisun pysyvä osoite on
https://urn.fi/URN:ISBN:978-952-323-444-4Tiivistelmä
ABSTRACT
This study examines the relationship between securitization and loan performance using proprietary loan-level data from a Chinese bank. Securitized loans exhibit lower ex-post default rates and prepayment chances compared to the loans retained on the bank’s balance sheet, suggesting no adverse selection or moral hazard within the Chinese securitization market. Our finding is robust to controlling for possible endogeneity of loan selection by employing propensity score matching and instrumental variable estimators. Exploiting the introduction of the New Asset Management Rule as a quasi-natural experiment, which alters banks’ business model and eliminates other options of credit risk transfer except for securitization, we show worse loan performance after the new regulation, in line with deterioration of the bank’s incentive. This unintended consequence of the New Asset Management Rule, aimed at curbing shadow banking activities of banks, highlights the emergence of risk in the securitization sector of the shadow banking.
This study examines the relationship between securitization and loan performance using proprietary loan-level data from a Chinese bank. Securitized loans exhibit lower ex-post default rates and prepayment chances compared to the loans retained on the bank’s balance sheet, suggesting no adverse selection or moral hazard within the Chinese securitization market. Our finding is robust to controlling for possible endogeneity of loan selection by employing propensity score matching and instrumental variable estimators. Exploiting the introduction of the New Asset Management Rule as a quasi-natural experiment, which alters banks’ business model and eliminates other options of credit risk transfer except for securitization, we show worse loan performance after the new regulation, in line with deterioration of the bank’s incentive. This unintended consequence of the New Asset Management Rule, aimed at curbing shadow banking activities of banks, highlights the emergence of risk in the securitization sector of the shadow banking.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
Contemporary banks have shifted away from the traditional "originate-to-hold" approach to adopting an "originate-to-distribute" model. Critics argue that, following the US subprime mortgage crisis, this shift has led to a reduced motivation for lenders to thoroughly assess and oversee borrowers. Although the concept of information challenges in securitization is widely acknowledged in theory, empirical findings have produced mixed results. To investigate whether adverse selection and moral hazard exist in the Chinese loan securitization, we compare the ex-post default risk and prepayment risk of securitized loans with those held by the originator on the balance sheet.
CONTRIBUTION
Our research contributes to the growing body of literature that explores the relationship between securitization and loan performance, information challenges, and agency issues in the securitization process. We offer three primary contributions. Firstly, while most previous empirical studies that use loan-level data have predominantly focused on developed economies, especially the U.S. mortgage market, there has been limited attention given to the practices of securitization in emerging markets. Secondly, the majority of prior investigations have concentrated on understanding information challenges in mortgage securitization or Collateralized Loan Obligation (CLO) markets, with only a few delving into the securitization of consumer credit and small business loans due to data constraints. Lastly, in contrast to earlier research that has either uncovered evidence of adverse selection and moral hazard or found no such evidence, we discover that a bank's inclination towards cream-skimming is influenced by bank regulations and its specific business model.
FINDINGS
In our analysis, we employ a dataset encompassing consumer and small business loans sourced from a Chinese commercial bank. Our findings reveal a noteworthy pattern: loans that the bank sells exhibit notably lower default and prepayment risks compared to those it retains on its own balance sheet. This observation implies that there is no clear indication of adverse selection or moral hazard in the loan securitization process. Furthermore, we take advantage of the introduction of the New Asset Management Rule, treating it as a quasi-natural experiment. Our robust analysis provides compelling confirmation that loan performance tends to worsen when liquidity constraints are less stringent, alternative avenues for credit risk transfer are limited, and regulatory pressures are more pronounced.
FOCUS
Contemporary banks have shifted away from the traditional "originate-to-hold" approach to adopting an "originate-to-distribute" model. Critics argue that, following the US subprime mortgage crisis, this shift has led to a reduced motivation for lenders to thoroughly assess and oversee borrowers. Although the concept of information challenges in securitization is widely acknowledged in theory, empirical findings have produced mixed results. To investigate whether adverse selection and moral hazard exist in the Chinese loan securitization, we compare the ex-post default risk and prepayment risk of securitized loans with those held by the originator on the balance sheet.
CONTRIBUTION
Our research contributes to the growing body of literature that explores the relationship between securitization and loan performance, information challenges, and agency issues in the securitization process. We offer three primary contributions. Firstly, while most previous empirical studies that use loan-level data have predominantly focused on developed economies, especially the U.S. mortgage market, there has been limited attention given to the practices of securitization in emerging markets. Secondly, the majority of prior investigations have concentrated on understanding information challenges in mortgage securitization or Collateralized Loan Obligation (CLO) markets, with only a few delving into the securitization of consumer credit and small business loans due to data constraints. Lastly, in contrast to earlier research that has either uncovered evidence of adverse selection and moral hazard or found no such evidence, we discover that a bank's inclination towards cream-skimming is influenced by bank regulations and its specific business model.
FINDINGS
In our analysis, we employ a dataset encompassing consumer and small business loans sourced from a Chinese commercial bank. Our findings reveal a noteworthy pattern: loans that the bank sells exhibit notably lower default and prepayment risks compared to those it retains on its own balance sheet. This observation implies that there is no clear indication of adverse selection or moral hazard in the loan securitization process. Furthermore, we take advantage of the introduction of the New Asset Management Rule, treating it as a quasi-natural experiment. Our robust analysis provides compelling confirmation that loan performance tends to worsen when liquidity constraints are less stringent, alternative avenues for credit risk transfer are limited, and regulatory pressures are more pronounced.