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Transcript of Securitization and Dividend Payout by Banks - uni- .Securitization and Dividend Payout by Banks...

Securitization and Dividend Payout byBanks

Inaugural-Dissertation

zur Erlangung des Grades

Doctor oeconomiae publicae (Dr. oec. publ.)

an der Volkswirtschaftlichen Fakultat

der Ludwig-Maximilians-Universitat

Munchen

2010

vorgelegt von

Desislava Chavdarova Andreeva

Referent: Professor Dr. Gerhard Illing

Korreferent: Professor Dr. Monika Schnitzer

Promotionsabschlussberatung: 17. November 2010

Acknowledgments

The support of many - supervisors, colleagues, friends, and family - helped

me to successfully complete this thesis.

First and foremost, I would like to thank my supervisor Prof. Gerhard Illing

for his invaluable advice and continuous encouragement whilst writing the

thesis. I have learnt a lot from him, not only in lectures and seminars but

also in the numerous enlightening discussions about economics and economic

policy with him and colleagues at the Seminar of Macroeconomics.

Furthermore, I am grateful to Prof. Monika Schnitzer who kindly agreed to

act as my second examiner. I was happy to win Prof. Sven Rady to be my

third examiner.

My co-authors Ivan Andreev and Katri Mikkonen I thank for the inspiring

and productive cooperation. Special thanks go also to my dear current and

former colleagues at the Seminar for Macroeconomics Julia Bersch, Agnes

Bierprigl, Josef Forster, Moritz Hahn, Florian Kajuth, Stephan Sauer, Se-

bastian Watzka, Sebastian Jauch, Sebastian Missio and Michael Zabel, as

well as to all former student assistants.

I am grateful to my parents and brother for distracting me from research and

teaching every time I was back in Bulgaria and to Ivan for having been by

my side the last 10 years.

Desislava Chavdarova Andreeva

Contents

Contents i

List of Figures iii

List of Tables iv

1 Introduction 1

Bibliography 5

2 Securitization, incentives, and bank lending: A principal-

agent model 7

2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2.2 The basic securitization process . . . . . . . . . . . . . . . . . 10

2.3 Literature review . . . . . . . . . . . . . . . . . . . . . . . . . 11

2.4 Related regulation and accounting rules . . . . . . . . . . . . . 14

2.5 A principal-agent model of securitization . . . . . . . . . . . . 17

2.6 The securitization contract . . . . . . . . . . . . . . . . . . . . 20

2.7 Benchmark: no securitization . . . . . . . . . . . . . . . . . . 23

2.8 Securitization . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

2.8.1 The first best case . . . . . . . . . . . . . . . . . . . . 25

2.8.2 The second best case . . . . . . . . . . . . . . . . . . . 28

2.9 Welfare implications . . . . . . . . . . . . . . . . . . . . . . . 32

2.10 Discussion of results and some policy implications . . . . . . . 35

2.11 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Bibliography 39

A Appendix to chapter 2 . . . . . . . . . . . . . . . . . . . . . . 43

i

A.1 Proof of the uniqueness of the equilibrium in Section 2.7 43

A.2 Derivation of the optimality conditions for the observ-

able effort choice . . . . . . . . . . . . . . . . . . . . . 43

A.3 The second best case . . . . . . . . . . . . . . . . . . . 46

A.4 Proof of Proposition 2 . . . . . . . . . . . . . . . . . . 50

3 The empirics of securitization by banks: Determinants and

incentive effects 52

3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

3.2 Related literature . . . . . . . . . . . . . . . . . . . . . . . . . 56

3.3 Data and summary statistics . . . . . . . . . . . . . . . . . . . 60

3.4 Determinants of securitization activity . . . . . . . . . . . . . 67

3.5 The extensive margin of securitization . . . . . . . . . . . . . 73

3.6 The intensive margin of securitization . . . . . . . . . . . . . . 81

3.7 The incentive effects of securitization . . . . . . . . . . . . . . 91

3.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Bibliography 104

B Appendix to chapter 3 . . . . . . . . . . . . . . . . . . . . . . 109

4 Bank dividends in times of crisis 119

4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

4.2 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

4.3 Current regulatory debate . . . . . . . . . . . . . . . . . . . . 123

4.4 Related literature . . . . . . . . . . . . . . . . . . . . . . . . . 127

4.5 Data description and summary statistics . . . . . . . . . . . . 130

4.6 Empirical model . . . . . . . . . . . . . . . . . . . . . . . . . . 133

4.7 Dividends in the United States . . . . . . . . . . . . . . . . . 143

4.8 Dividends in the European Union . . . . . . . . . . . . . . . . 158

4.9 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

Bibliography 166

C Appendix to chapter 4 . . . . . . . . . . . . . . . . . . . . . . 171

C.1 Data description . . . . . . . . . . . . . . . . . . . . . 171

C.2 Sensitivity analysis . . . . . . . . . . . . . . . . . . . . 175

ii

List of Figures

2.1 Cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

2.2 Credit market without securitization . . . . . . . . . . . . . . 24

2.3 Credit market in the first best case . . . . . . . . . . . . . . . 28

2.4 Securitized loans in the second best case . . . . . . . . . . . . 33

2.5 Credit market in the second best case . . . . . . . . . . . . . . 34

3.1 Evolution of the amount outstanding of securitized assets in

the US during the period 1970-2007 . . . . . . . . . . . . . . . 54

3.2 Number of banks reporting securitization activity during the

quarters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

3.3 Bank size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

3.4 Credit risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

3.5 Bank profitability . . . . . . . . . . . . . . . . . . . . . . . . . 65

3.6 Regulatory capital ratios . . . . . . . . . . . . . . . . . . . . . 66

3.7 Securitization exposure . . . . . . . . . . . . . . . . . . . . . . 66

3.8 Delinquencies on securitized and retained home equity lines . . 93

3.9 Seller-provided credit enhancements . . . . . . . . . . . . . . . 116

4.1 Ratio of aggregate dividends to aggregate net income in the

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

4.2 Ratio of aggregate dividends to aggregate net income in the

European Union . . . . . . . . . . . . . . . . . . . . . . . . . . 125

4.3 Aggregate net income and dividends in the United States . . . 126

4.4 Mean of the dividend to net income ratio in the United States 134

4.5 Mean of the dividend to net income ratio in the European Union135

4.6 Mean of the adjusted dividend payout ratio in the United States144

4.7 Mean of the adjusted dividend payout ratio in the United States145

4.8 Mean of bank dividends and net income in the USA . . . . . . 175

iii

List of Tables

3.1 The extensive margin of securitization: using Capital/RWA

Corrected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

3.2 The extensive margin of securitization: using Tier 1/Total

Assets Corrected . . . . . . . . . . . . . . . . . . . . . . . . . 80

3.3 Dynamic difference GMM estimation results using Capital/RWA

Corrected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

3.4 Dynamic difference GMM estimation results using Tier1/Total

Assets Corrected . . . . . . . . . . . . . . . . . . . . . . . . . 88

3.5 Mean comparison of total delinquencies on securitized vs. re-

tained loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

3.6 Regression-based comparison of total delinquencies on securi-

tized vs. retained loans . . . . . . . . . . . . . . . . . . . . . . 96

3.7 Total delinquencies of securitized loans: FE estimates . . . . . 101

3.8 Pairwise correlations of capital ratios . . . . . . . . . . . . . . 109

3.9 Pairwise correlations . . . . . . . . . . . . . . . . . . . . . . . 110

3.10 Descriptive statistics . . . . . . . . . . . . . . . . . . . . . . . 111

3.11 Pairwise correlations of explanatory variables . . . . . . . . . . 112

3.12 The extensive margin of securitization: using Capital/RWA . . 113

3.13 The extensive margin of securitization: using Tier1/Total Assets114

3.14 The intensive margin of securitization: random- vs. fixed-

effects estimates . . . . . . . . . . . . . . . . . . . . . . . . . . 115

3.15 Mean comparison of delinquencies by type of loan and time

past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

3.16 Total delinquencies of securitized loans: RE estimates . . . . . 118

4.1 Fixed-effects estimation results for the pre-crisis period, US

sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

iv

4.2 Fixed-effects estimation results for the crisis period, US sample 150

4.3 Fixed-effects estimation results including crisis interaction terms,

US sample . . . . . . . . . . . . . . . . . . .