Better be Careful: The Replenishment of ABS backed by SME Loans
Joint work with Arved Fenner and Carina Mössinger
Presented at WWU (Münster), HVB Doctoral Seminar 2019 (Hannover), Research Seminar at the University of Paderborn 2019 (Paderborn), BGSE Summer School 2019 (Barcelona), DGF 2019 (Essen), SFA 2019 (Orlando), Banking Workshop 2019 (Münster), PFMC 2019 (Paris), Australasian Finance & Banking Conference 2019 (Sydney), Sydney Banking and Financial Stability Conference 2019 (Sydney), IBEFA 2020 (San Diego), SGF 2020 (Zürich, accepted but canceled), FFI 2020 (Stockholm), Research Seminar in Contract Theory, Banking and Money at the University of Zurich 2020 (Zurich), Bundesbank Research Seminar 2020 (online), AFA 2021 (online), NFA (online), “Credit Risk over the Business Cycle” conference organized by Deutsche Bundesbank, FRIC Center, and CEPR (online), EUROFIDAI Paris December 2021 Finance Meeting (online), European DataWarehouse Winter Research Update Webinar in 2022 (online), FIRS 2023 (Vancouver), CEBRA 2023 (New York)
Abstract: We investigate the replenishment of 102 asset-backed securities (ABS) that are backed by more than 1.7 million small- and medium-sized enterprise loans and that need to be clearly distinguished from Collateralized Loan Obligations (CLOs). Based on our extensive data set from 2012 to 2017 obtained from the only central loan-level repository for ABS in Europe, we reveal that loans added to securitized loan portfolios after the transactions' closing perform worse than loans being part of the initial portfolio. On average, we find that loans added to securitized loan portfolios demonstrate a 0.42 percentage points higher probability of default. We additionally provide evidence that originators induce these performance differences by adding low-quality loans to securitized loan portfolios. At issuance, investors seem not to be aware of the potential negative impact of portfolio replenishment and demand lower instead of higher yield spreads if the respective portfolio is more prone to portfolio replenishment. During the ABS term, investors adjust their opinion and pay a lower price for those tranches whose underlying loan portfolio is replenished more strongly. The observed adverse behavior by originators is mitigated by their reputation efforts, by increasing transparency in the ABS market, as for example per the European Central Bank's loan-level initiative, and most effectively by their interaction.
Textual Disclosure in ABS Prospectuses and Investors’ Security Pricing
Joint work with Jörn Debener, Arved Fenner and Steven Ongena
Presented at WWU (Münster), University of Zurich, and the University of Tübingen, 2021 Conference of the International Finance and Banking Society, the 2021 International Risk Management Conference, the 2021 Münster Banking Research Workshop, the 35th Australasian Finance and Banking Conference, the 38th International Conference of the French Finance Association, the 2022 Summer Meeting of the International Banking, Economics and Finance Association, the 2022 Annual Meeting of the European Financial Management Association, the 2022 European Conference of the Financial Management Association, the 2023 Annual Meeting of the European Economic Association, the 2023 Annual Meeting of the German Operations Research Society, 22nd International Conference on Credit Risk Evaluation (scheduled), the 29th Annual Meeting of the German Finance Association (DGF, scheduled)
Abstract: We investigate the impact of textual disclosures' quality and the quantity, measured as the share of boilerplate language, the linguistic complexity, and the disclosure length, on investors' security pricing at issuance. Exploiting an extensive data set of over 1,000 issuance prospectuses covering all transactions under the European Central Bank's loan-level reporting initiative, we show that the prospectuses' quality and the quantity substantially affect investors' pricing beyond all observable risk factors. Investors demand an economically significant lower yield spread, if the share of boilerplate language increases, while longer prospectuses lead to higher spreads. We provide three mechanisms for our results: presumed default risk, level of information asymmetry, and visualizations supplementing the prospectus. Investors' risk assessment is weakened because the resulting prices are less predictive for future security performance. We show empirically that these results are not driven by information on performance or deal complexity being potentially included in the textual disclosure measures. Recent EU regulations aiming at addressing these problems have homogenized the quality and quantity of textual disclosure in ABS prospectuses. Our results have important implications for market participants and regulators alike, placing the quality and quantity of textual disclosure in prospectuses high on their agenda.
Credit Securitization as Sustainable Finance Channel? – Evidence from Synthetic Capital Relief Trades
Joint work with Alexander Nitschke and Andreas Pfingsten
Presented at Banking Workshop 2022 (Münster), PFMC 2022 (Paris), Southwestern Finance Association Conference 2023, AFFI 2023, CEBRA 2023, the 29th Annual Meeting of the German Finance Association (DGF, scheduled)
Abstract: Securitization can serve different purposes. We employ a novel data set of synthetic transactions aiming at releasing capital, so-called synthetic capital relief trades (SCRTs). Our study examines bank characteristics driving SCRT issuances as well as the impact of these transactions for banks and the loan supply in the economy. Ex ante, we find higher total capital ratios not to incentivize banks’ SCRT issuances, while non-performing loans ratios have a negative effect. Ex post, we observe that SCRT issuances lead to a significant increase in the supply of syndicated green loans, while the overall supply of syndicated loans is not expanded. These green loans are riskier than the existing loan portfolio finally raising banks’ non-performing loans ratios. The total capital ratios are not affected by SCRTs, evidencing that capital arbitrage as known from before the Global Financial Crisis seems no longer to be possible. Our results have important policy implications. Banks use SCRTs to eventually increase green lending, which can be seen as one potential remedy to overcome the green finance gap, while adverse effects of SCRTs seem to be prevented.