Securitisation and monetary policy (PowerPoint) by fanzhongqing

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									Securitisation and the
bank lending channel
Yener Altunbas (University of Wales, Bangor)
Leonardo Gambacorta (Bank of Italy)
David Marqués (ECB)

2nd Symposium of the ECB-CFS Research Network on “Capital markets and
financial integration in Europe” - Frankfurt, 13-14 February 2008

This paper represents the views of the authors only and not necessarily those of the
institutions to which they are affiliated
The main findings of the paper
   The development of securitisation had a strong
    impact on lending supply
   In “normal times” securitisation activity shelters
    banks from the transmission of monetary policy
    impulses
   Securitization activity is pro-cyclical and therefore
    this “insulation effect” vanishes in bad times and
    could even reverse in an amplification of the bank
    lending channel
Overview of the presentation
1.   Motivation
2.   Developments in securitization in the euro area
3.   How does securitization affect the monetary
     transmission mechanism?
4.   The data and the econometric model
5.   Results
6.   What are the effects of a reduction in securitization
     activity on loan supply in the euro area?
7.   Conclusions
1. Motivation
   Since the introduction of the euro we have witnessed a
    significant increase in securitization activity. In 2006
    securitized lending amounted to around one-fifth of new
    loans in the euro area.
       This process has altered the fundamental liquidity
        transformation and monitoring role of banks
        (Diamond,1984; Holström and Tirole, 1997). It has also
        amplified bank’s ability to supply new loans.
       How this has changed the monetary transmission?
        We claim that the new role of banks from “originate and
        hold” to “originate and distribute” has an impact on the
        bank lending channel.
2. Securitisation in the euro area
250,000                                                                        750
                    Volume (left-hand scale)
                                                                                     ABS issuance in euro
                    Number of issues (right-hand scale)
200,000                                                                        600   has finally taken off
                                                                                     since the introduction
150,000                                                                        450
                                                                                     of the euro that has
                                                                                     contributed to
                                                                                     financial integration.
100,000                                                                        300




 50,000                                                                        150




     0                                                                         0
      1999   2000       2001      2002         2003       2004   2005   2006
                                Securitisation activity
                      (percentages of GDP, by country of collateral)
15



                                               2000         2006

10




5




0
               Euro Area                              UK                               USA
     Data sources: European Securitization Forum, Bond Market Association, Eurostat. Euro area figures
     do not include Pfandbriefe; US data exclude Federal Agency securities.
2. Securitisation in the euro area (3)
    Securitisation by type of instrument in 2005
       (euro-denominated, volumes, cash funded instruments only)
                                                                          The bulk of the activity
                                                                          is based on ‘granular’
                       CDOs
                                                                          mortgage-backed
                       18%                                                securities (2/3). They
      Corporate ABS
                                                                          are characterized by
           6%                                                             an high degree of
                                                                          commoditisation and
                                                                          an high
    Consumer ABS                                                   RMBS
         8%                                                         53%   standardisation of
                                                                          credit assessment
                                                                          techniques.
                   CMBS
                    15%
2. Securitisation in the euro area (4)
                 Securitisation by country of issuance in 2005
                        (volumes, CDOs are excluded)


                            other     Portugal
                   France    3%         5%
                    5%
                                                         Spain       Securitisation has taken
                                                         27%         off in most euro area
                                                                     countries and has been
                                                                     particularly strong in
   Netherlands                                                       those countries
      27%
                                                                     experiencing strong
                                                                     increases in housing
                                                           Germany
                                                             11%
                                                                     prices


                                     Italy
                                     22%
3. How does securitization affect the
monetary transmission mechanism?(1)
     Securitization has reduced the fundamental role
      of liquidity transformation performed by banks.

     While the origination of loans remains locally
      based, securitization can make the funding of
      previously illiquid loans global by making them
      tradable.
     We claim that securitization activity has changed
      the standard set up of the Bernanke and Blinder
      model (1988).
3. How does securitization affect the
monetary transmission mechanism?(2)

    In the case of a monetary tightening, if the
     reduction in deposits is not compensated by banks
     by issuing CDs or bonds, a drop in supplied
     lending occurs.
    The “bank lending channel” literature claims that
     the drop of supplied lending will be less severe for
     big, liquid and well-capitalized banks (Kashyap
     and Stein, 1995; Kishan and Opiela, 2000;
     Gambacorta and Mistrulli, 2004).
3. How does securitization affect the
monetary transmission mechanism?(3)
    We argue that securitization alters the traditional “bank
     lending channel” in two ways.
        Extra liquidity: banks may obtain additional liquidity
         independently of their securities holdings. This
         mechanism reduces the effectiveness of the “bank
         lending channel” in a way similar to the famous Romer
         and Romer (1990) critique.
        Capital relief: by removing loans from their balance-
         sheet, banks can obtain a regulatory capital relief which
         allows for a positive net effect on the loan supply.
4. Data: sources (1)

    Banks’ individual data, from Bankscope, from 1999
     to 2005 to cover the single currency.
    Unbalanced sample of around 3,000 banks
     accounting for a total of about 75% of bank lending
     in the euro area.
    Data on individual securitization deals (Bondware
     and S&P) have been matched with the balance sheet
     statements of each bank originating the deal.
4. Data: two measures for risk (2)
   We have inserted two control variables accounting
    for banks’ risk. The latter may affect the ability and
    willingness of a bank to grant credit.

    1.   Loan-loss provisions as a percentage of loans:
         ex-post accounting measure of credit risk.

    1.   Expected default frequency (EDF): forward-
         looking estimator of credit risk computed by
         Moody’s KMV.
4. The econometric model (3)
          Our empirical specification builds on the standard set up used in
           Kashyap and Stein (1995), Ehrmann et al. (2003) and Ashcraft (2007).
           In addition we incorporate the effect of securitisation and risk.
Growth rate in lending                                                                                Securitization
                                                 Nominal GDP          Interest rate changes           activity indicator

                                             1                           1                1
     ln( Loans)it   ln( Loans)it 1    j  ln(GDPN)t  j    j iM t  j    j iM t  j * SECt 1 
                                            j 0                        j 0             j 0
       1                           1                         1
       j iM t  j * SIZEt 1    j iM t  j * LIQt 1    j iM t  j * CAP1  SECt 1 
                                                                                    t
      j 0                        j 0                      j 0

     SIZEt 1  LIQt 1  CAP1  LLP 1 EDP 1   it
                                 t        it       it




                                          Bank risk variables: Loan loss provisions and Expected
Individual bank variables                 Default Probability
i=1,…,      N and t=1, …, T where N is the number of banks and T is the year.
5. Results: SEC and loan supply (1)

   Securitization activity has a direct and positive
    impact on the average growth rate of supplied
    lending. On the contrary, banks’ risk have a negative
    effect.

   These effects are conditional upon business (and
    overall liquidity) conditions: securitization activity
    tends to be higher in a boom and reverse during an
    economic slowdown.
5. Results: SEC and MTM (2)
   In “normal times” securitization reduces the
    effectiveness of the Bank Lending Channel: banks
    that are more active in the securitization market are
    more insulated from monetary policy changes.

   By how much? Insulation depends on the degree of
    activism on the market. It is very high if a bank
    tends to securitize around one quarter of her assets.
5. Results: Effect of a one percent increase of the
monetary policy rate on bank lending (3)
 0.2
          Average bank        Median SEC bank            Average SEC bank
           (SEC=0.02)           (SEC=0.10)                  (SEC=0.25)
 0.0



                                                           -0.14
 -0.2


                                                                    -0.30

 -0.4
                              -0.43***


                                         -0.55***
 -0.6
        -0.62***
                                                    Effects after one year
                   -0.71***                         Long run effect
 -0.8
    6. What are the effects of a drop in securitization
    activity on loan supply in the euro area? (1)
    The sub-prime mortgage crisis has changed market sentiment
     about the use of structured products. In the past few months
     the volume of securitization activity has been reduced.
          20%

          18%        Euro area
                     UK
          16%
                     US
          14%

          12%

          10%

           8%

           6%

           4%

           2%

           0%
                1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
    6. What does the model really tell us?
    Some simulations on the effects of a drop in
    securitization activity on loan supply (2)
    There is now a greater uncertainty about the use of these
     finance products and a general lack of transparency on what is
     on banks’ balance sheets. The real important question is:
     Has the “Originate-to-distribute”model come to an end?
    In our opinion the crisis of the OTD model will change the
     structure of banking, but it is hard to imagine that the
     industry will abandon securitization. We can imagine a
     reduction in activity that brings the model back some years.
    For example, what does it happen to supplied lending if the
     volume of securitized loans goes back to 2005 (a reduction of
     30%) or to the average over the period 1998-2006 (-60%)?
6. The effects of a drop in securitization activity on
loan supply in the euro area: different scenarios (3)
                                                    Strong effect: back to the
       Light effect: back to 2005                  average values of 1999-2006
  0




                       -0.5%
  -1



                                                                    -1.5%
  -2
       The volume of s ecuritiza tion a ctivity     The volume of s ecuritiza tion a ctivity
       drops by 30% a nd the E xpected              drops by 60% a nd the E xpected
       Defa ult P roba bility for the a vera g e    Defa ult P roba bility for the a vera g e
       ba nk increa s es from 0.05% to 0.07%        ba nk increa s es from 0.05% to 0.14%

  -3
6. The effects of a drop in securitization activity on
loan supply in the euro area: different scenarios (4)
   The effects would be larger in case the use of bank
    credit lines by conduits put additional pressure on
    bank capital.
   The crucial question is to what extent such a possible
    reduction in the supply of loans would affect real
    GDP growth.
   Preliminary results - obtained using VECM and
    DSGE models - show that the effects on GDP are
    very different assuming that the central bank reacts to
    the credit supply shock or not.
7. Conclusions
   We find that the changing role of banks from
    “originate and hold” to “originate to distribute”
    reduces in “normal times” the effectiveness of BLC
    of monetary policy.
   However, securitization activity is pro-cyclical and
    therefore the “insulation effect” vanishes in bad
    times and could even reverse in an amplification of
    the bank lending channel.
   Simulations show that the impact of the recent
    turmoil on loan supply also depends on how severe
    will be the reduction in securitization activity.

								
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