Asset securitizations and bank stability: evidence from different banking systems

Abstract

The impact of asset securitization on the risk and performance (i.e. financial stability) of banks, both individually and systemically, is the subject of substantial debate by financial regulators and practitioners. This paper is the first to empirically examine the impact of various contractual types of asset securitizations on the financial stability of an international sample of commercial banks in 21 countries between the years of 2003 and 2012. Our results indicate that banks involved in asset securitization are generally more risky and less financially stable. Additionally, we find that, in-crisis, Islamic banks involved in a constrained model of assets securitization showed higher asset quality, in spite of being less cost efficient, in comparison to their conventional counterparts. The study provides important insights and policy implications regarding varying securitization contractual structures for banks and the influence on long-term bank financial stability.