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e®ective risk transfer among market
participants has not yet been carried out. To the best of our knowledge, this paper is
the ¯rst empirical analysis of how risk transfer through credit securitizations a®ect the
exposure of the issuing banks. Theory does not give a clear prediction about how risk
transfer will a®ect systematic bank ownership risk. The net e®ect clearly hinges upon
the replacement e®ect: if the risks that are transferred from the bank balance sheet are
substituted by less highly correlated assets, then bank equity beta will decrease. On
the other hand, if the risks transfer results in a higher diversi¯cation of the bank port-
folio, the correlation with the market portfolio will rise, and equity betas will approach
market beta. Therefore, if asset beta is below one, will rise; and will fall otherwise.
2
Recent investigations into the correlation between credit-linked notes have shown that
structured ¯nance products may well lead to an increase of the issuer's risk taking, also
considered moral hazard (Instefjord 2005).
In a numerical study, Krahnen/Wilde 2006 argue that under certain conditions on
the reinvestment of securitization proceeds, the issue of CDOs in true-sale transactions
will lead to an increase in bank exposure to a market risk factor. This result assumes
securitization issues are tranched, and the most junior (¯rst loss) piece is always retained
by the issuer, while issue proceeds are reinvested in a loan portfolio of similar risk
characteristics.

 

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