TY - JOUR
T1 - Asset securitization, cross holdings, and systemic risk in banking
AU - Xiao, Shuhua
AU - Zhu, Shushang
AU - Wu, Ying
N1 - Publisher Copyright:
© 2023 Elsevier B.V.
PY - 2023/8
Y1 - 2023/8
N2 - We present a theoretical framework for studying how the cross holdings of asset securitization products may affect systemic risk in banking. We demonstrate that cross holdings can be understood from the perspective of profit seeking and credit creation; these motives drive up banks’ leverage. We also show that the capital adequacy ratio regulatory constraint may become invalid with cross holdings, which adversely impacts the monitoring of the stability of a system. We demonstrate that, generally, the impact of asset securitization on systemic risk is nonmonotonic and critically hinges on the banking asset structure, cross-holding degree among banks, and asset securitization characteristics including its state of risk retention. We empirically examine theoretical predictions using a comprehensive set of data from 27 countries/regions spanning the past 15 years.
AB - We present a theoretical framework for studying how the cross holdings of asset securitization products may affect systemic risk in banking. We demonstrate that cross holdings can be understood from the perspective of profit seeking and credit creation; these motives drive up banks’ leverage. We also show that the capital adequacy ratio regulatory constraint may become invalid with cross holdings, which adversely impacts the monitoring of the stability of a system. We demonstrate that, generally, the impact of asset securitization on systemic risk is nonmonotonic and critically hinges on the banking asset structure, cross-holding degree among banks, and asset securitization characteristics including its state of risk retention. We empirically examine theoretical predictions using a comprehensive set of data from 27 countries/regions spanning the past 15 years.
KW - Asset securitization
KW - Banking system
KW - Cross holdings
KW - Systemic risk
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U2 - 10.1016/j.jfs.2023.101140
DO - 10.1016/j.jfs.2023.101140
M3 - Article
AN - SCOPUS:85161629319
SN - 1572-3089
VL - 67
JO - Journal of Financial Stability
JF - Journal of Financial Stability
M1 - 101140
ER -