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"&'&*#% */""$%'( %/ &# "'"'''&1&%$%("' %&$#"&"#*6%#!#(&# &/#%$#%'#"&/ "" %!&/"'#)%"!"'6&'&!&*'& *,&"&&%,'#)##&' , )%, 0'#&)#%%",,.4 • %,/% 1/#!&## ,/ ''*%&#"" "# '%/=;<;13 "('(%" &0 %&$')#"'"" %&&#=;;A5;B4/ ! /# 1?0 #1?/=?A5>=@1 • %,/ % 1/ #!& ## ,/ ''* %&#" " "# '% 7'#%&8/ =;<;1 /#%'#!"/ *#%")%&', '%"## #(&"&&" #" :#"&1 • %,/ % 1 " ''* %&#" 7'#%&8/ =;;B1 / *#%")%&','%"## #(&"&&" #" ,:#"&1 • %,/% 1/ $$" "(&')#(%-/=;;B13(%'-'#"'#('&%"&%4/ #%" $%/ *#%")%&','%"## #(&"&&1 • %"/ #&/ ! &%'/ , , #&, " # '" #-&%/ =;<;/ 9#*""9/#%" $%/% &%)"# *#%1 Viral V. Acharya Professor of Finance, Stern School of Business, NYU House Financial Services Oversight and Investigations Subcommittee “The End of Excess (Part One): Reversing Our Addiction to Debt and Leverage” May 6, 2010 Appendix 1. “Securitization without Risk Transfer” by Viral V. Acharya, Philip Schnabl, and Gustavo Suarez (First Draft: March 1, 2009; This Draft: April 15, 2010; 68 pages) 2. “Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007-09” by Viral V. Acharya, Thomas Cooley, Matthew Richardson, and Ingo Walter (Forthcoming, Foundations and Trends in Finance, volume 4, 2010; 85 pages) 3. Acharya Resume (10 pages) Securitization Without Risk Transfer1 Viral V. Acharya2, Philipp Schnabl3, and Gustavo Suarez4 First draft: March 1, 2009 This draft: April 15, 2010 Abstract We analyze asset-backed commercial paper conduits which played a central role in the early phase of the financial crisis of 2007-09. We document that commercial banks set up conduits to securitize assets worth $1.3 trillion while insuring the newly securitized assets using guarantees. The guarantees were structured to reduce bank capital requirements, while providing recourse to bank balance sheets for outside investors. Consistent with such recourse, we find that during the first year of the crisis, asset-backed commercial paper issuance fell and spreads increased, especially for conduits with weaker guarantees, riskier banks, and lower quality assets; that banks with more exposure to conduits had lower stock returns; and that losses from conduits remained with banks rather than outside investors. These results suggest that banks used this form of securitization to concentrate, rather than disperse, financial risks in the banking sector while reducing their capital requirements. 1 Authors are grateful to Matt Richardson, Marti Subrahmanyam, Dan Covitz, Nellie Liang, and faculty members at Stern School of Business, New York University for discussions on the topic and to research staff at Moody’s and Fitch Ratings for detailed answers to our queries. We thank David Skeie and Dennis Kuo for advice on bank call report data. We are also grateful to Christa Bouwman, Florian Heider, and Amit Seru (discussants) and seminar participants at the 2010 Meeting of the American Finance Association, the Stockholm Institute of Financial Research Conference on the Financial Crisis of 2007-09, the European Winter Finance Conference 2010, the European Central Bank, the SEC, the Federal Reserve Banks of New York and Richmond, New York University, the University of Southern California, and the University of North Carolina at Chapel Hill. This paper represents the views of the authors and not necessarily those of the Federal Reserve System or its Board of Governors. 2 Viral V Acharya, Department of Finance, Stern School of Business, New York University, 44 West 4th Street, Room 9-84, New York, NY-10012, US. Tel: +1 212 998 0354, Fax: +1 212 995 4256, e-mail: [email protected]. Acharya is also a Research Affiliate of the Centre for Economic Policy Research (CEPR) and Research Associate in Corporate Finance at the National Bureau
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