Securitization, monetary policy and bank stability

Bakoush, Mohamed, Mishra, Tapas and Wolfe, Simon (2020) Securitization, monetary policy and bank stability. In American Economic Association 2020 Annual Meeting, San Diego, CA, USA. (In Press)

Record type: Conference or Workshop Item (Paper)

Abstract

We provide new evidence about the effect of securitization activities on bank stability and systemic risk in the run-up to and following the global financial crisis by the role of monetary policy interest rates. In so doing, we propose S-score as a new measure of the net effect of securitization activities on bank stability. Analyzing the dynamics of this measure at the individual bank level and the banking system level shows that securitization activities have a destabilizing effect on banks. We also find that securitization increases commonality of asset returns among banks leading to increased interconnectedness and systemic risk. We also find that low monetary policy interest rates in the aftermath of the global financial crisis have mitigated the destabilizing effect of securitization on banks.

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