Reputation, pricing and performance in the European securitisation market

This study investigates the impact of reputation on the pricing and performance of securitised bonds. On the one hand, we ascertain whether investors incorporate the reputation and experience of issuers and trustees into pricing mortgage-backed securities (MBS). On the other hand, we examine the link between the disciplining mechanisms of price and issuer reputation on the performance of mortgage-backed securities proxied by delinquency rates and rating changes. We address these objectives using pricing and performance data on the MBS issued from 1999-2007 in 14 European countries’ securitisation markets.In perfect capital markets, asset backed securitisation should be irrelevant. However in an environment with asymmetric information, banks prefer to securitise assets rather than fund assets with deposits. The literature concurs that European banks mainly engage in securitisation to augment their liquidity positions and diversify their funding alternatives. Other incentives include risk diversification and regulatory capital arbitrage, however, this was a more common motive in the US, prior to the financial crisis. During that period, the growth of securitisation was fuelled by increased credit supply which in turn was nurtured by relaxed lending standards and a low interest rate environment. Furthermore, banks retained riskier loans and junior tranches to signal the quality of securitised bonds to investors. Hence securitisation, originally designed to transfer credit risk, ultimately involved very limited risk transfer. This trend resulted in the accumulation of risks on banks’ balance sheet which in tend increased the likelihood of a systemic crisis. Contemporary evidence from the equity markets also indicates securitisation announcements typically had negative wealth effects on the market value of issuing banks. As MBS issuance levels increased in the years preceding the financial crisis, investors in securitisation transactions also began to incorporate varying credit factors in excess of credit ratings into the launch spreads of securitised bonds. More importantly, spreads were informative enough to predict bond performance in terms of cumulative losses and rating downgrades.We examine pricing from two dimensions. In the first empirical chapter, we assess the certification value of issuer reputation in securitisation by examining initial yield spreads of MBS. We find that issuer reputation has a certification value for riskier, difficult to evaluate MBS, especially when information asymmetries in credit markets intensify. Furthermore, we show that MBS originated by subsidiaries of foreign banks are perceived to be riskier, regardless of the repuation of the issuer. We also find that investors require higher yields if there is a higher probability of rating shopping and when issuers expand rapidly.In the second empirical chapter, we consider the role of trustees –who are nominated to protect the interests of investors– in securitisation pricing and whether investors rely on them to mitigate risks. We assess the effect of trustee reputation on initial yield spreads and we find that engaging reputable trustees led to lower spreads during the credit boom period prior to the 2007-2009 financial crisis. Our findings suggest that trustees’ reputation was considered by investors to be more important when risk assessment became more challenging. Thus, investors began to associate trustee reputation with effective debt monitoring as the concern for defaults grew in the boom period. In hindsight, it is evident that investors took steps to protect their investments, however inadequate, by adjusting the valuations of the structured notes they purchased.Concerning performance, in the third empirical chapter, we find that reputable issuers sold bonds collateralized by low-quality assets during the boom period. However, these bonds were less likely to be downgraded by rating agencies, probably due to the compensating effects of structuring techniques. We attribute this decline in quality to reduced monitoring efforts. We also find that foreign reputable issuers tend to sell lower quality bonds, which are more likely to be downgraded. Furthermore, we confirm that initial yield spreads are informative enough to predict performance. More specifically, this finding is solely driven by non-AAA rated bond yields. Our key finding, however, is that initial yields were generally not informative in the years preceding the boom period (2004-2007). Therefore, at the turn of the millennium, most investors exclusively relied on credit ratings. However, during the growth period, sophisticated investors began to price the increased uncertainty and complexity associated with MBSs.Overall, the analysis provides some insights on the role of reputation in the securitisation markets. Investors demanded lower spreads on securities with reputable sponsors and trustees especially during the growth period preceding the 2007-09 financial crisis. Although the quality of the assets underlying these securities deteriorated rather rapidly, the securitised bonds were less likely to be downgraded, most likely due to countervailing structural features. Furthermore, the findings of this study show that investors, mainly sophisticated investors, grew increasingly sceptical in the years preceding the financial crisis. This is evident in the relative predictive potency of initial yield spreads on non-prime bonds issued during this period

Bank reputation and securitization quality:European evidence

We examine the link between issuer bank reputation and the performance of mortgage-backed securities (MBS) in the European market. We find that MBS sold by reputable issuer banks are collateralised by higher quality asset pools with lower delinquency rates and are less likely to be downgraded. However, during boom periods – characterized by declining credit standards, MBS originated by reputable issuer banks tend to be collateralised by lower quality assets, compared to normal periods

Non-Standard Errors

In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: Non-standard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for better reproducible or higher rated research. Adding peer-review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants

Trustee reputation in securitization:When does it matter?

We consider the role of trustees –who are nominated to protect the interests of investors– in securitization pricing and whether investors rely on them to mitigate risks. In particular, we examine the effect of trustee reputation on initial yield spreads of European mortgage-backed security (MBS) issuances between 1999 and the first half of 2007. We find that engaging reputable trustees led to lower spreads during the credit boom period prior to the 2007-2009 financial crisis. Our findings suggest that trustees’ reputation was considered by investors to be more important when risk assessment became more challenging

Securitization: Past, Present and Future [electronic resource] /

This book aims to explore if and how securitisation changed financial intermediation and lending behaviour by reviewing the pre- and post-financial crisis theoretical and empirical literature. The book’s distinctive feature is bringing the growing post-crisis empirical evidence to the attention of a wider audience by critically appraising it against pre-crisis arguments. With its thought-provoking insights, this book is of particular interest for students, practitioners and academics.Chapter 1: Introduction -- Chapter 2: Mechanics of Securitization.-Chapter 3: Securitization Structures.-Chapter 4: A Historical and Regional Overview of Securitization -- Chapter 5: Effects of Securitization on Banks and the Financial System -- Chapter 6: Valuation of ABS under Asymmetric Information.-Chapter 7: The Role of Securitization in 2007-2009 Crisis.-Chapter 8: Securitization: Key Trends since the Crisis.-Chapter 9: Concluding remarks.This book aims to explore if and how securitisation changed financial intermediation and lending behaviour by reviewing the pre- and post-financial crisis theoretical and empirical literature. The book’s distinctive feature is bringing the growing post-crisis empirical evidence to the attention of a wider audience by critically appraising it against pre-crisis arguments. With its thought-provoking insights, this book is of particular interest for students, practitioners and academics

Access to consumer credit in the UK

This paper investigates household access to consumer credit in the UK using information on 58,642 households between 2001 and 2009. Employing a treatment-effects model and propensity score matching, we find that non-white households are less likely to have financing compared to white households. We also find that even if they obtain financing, the intensity of borrowing is lower than for white households. Overall, non-white households seem to be in a weaker position to access consumer credit in the UK

Non-Standard Errors

URL des documents de travail : https://centredeconomiesorbonne.cnrs.fr/publications/Documents de travail du Centre d'Economie de la Sorbonne 2021.33 - ISSN : 1955-611XVoir aussi ce document de travail sur SSRN: https://ssrn.com/abstract=3981597In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in sample estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: non-standard errors. To study them, we let 164 teams test six hypotheses on the same sample. We find that non-standard errors are sizeable, on par with standard errors. Their size (i) co-varies only weakly with team merits, reproducibility, or peer rating, (ii) declines significantly after peer-feedback, and (iii) is underestimated by participants

Non-Standard Errors

In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: Non-standard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for better reproducible or higher rated research. Adding peer-review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants