Brown Bag Seminar with Matthias Efing, SFI, University of Geneva

The Department of Finance is happy to announce the upcoming Brown Bag Seminar with Matthias Efing, Swiss Finance Institute, University of Geneva.

Matthias Efing will present:

Arbitraging the Basel Securitization Framework: Evidence from German ABS Investment

Abstract:

This paper uses data about bond holdings of banks domiciled in Germany to analyze adverse selection in the structured debt market. Within a group of asset-backed securities (ABS) with the same Basel II risk weight, banks tend to buy the ABS with the highest yield spreads, the most inflated credit ratings, and the worst collateral. The effect is more pronounced for banks operating with capital adequacy ratios close to the regulatory minimum requirement. The evidence suggests that regulatory arbitrage considerations influence the selection of ABS and that ratings inflation reinforces regulatory arbitrage as Basel II risk weights depend mechanically on credit ratings.