Three essays on securitization

Off-balance sheet financings and securitization in particular, are viewed by many as the culprits of the 2007 financial meltdown. In a securitization transaction, assets are sold to a special purpose entity that finances the acquisition by issuing debt securities at various seniority levels to investors. In theory, the transaction relies crucially on the assumption that the risks of owning the assets are truly separated from the securitizer and reside with investors. However, in reality financial institutions take advantage of accounting rules, regulatory capital requirements, and supervisors’ indecisive actions and create a plethora of asset-backed securities (ABS) that do not completely remove the risks of owning the assets.In my dissertation I show that securitizations negatively affect their parents, that investors do not consider ABS-deals separately from their sponsors, and that these transactions are more akin to financings than sales. Furthermore, I document that securitizers of downgraded ABS-deals face significant market discipline, as investors clearly understand the relation between ABS sponsors and their off-balance sheet deals. In addition, I find that internal control mechanisms mitigate some of the negative effects associated with securitization.In light of the ongoing debt on the future of financial intermediation in general and securitization in particular, my dissertation offers a unique perspective on some of the contested issues. First, transparent reporting requirements should focus on the level of retained risk and translate into on-balance sheet capital requirements. Second, ABS downgrades can serve as a valuable signal to regulators and allow them to link both on and off-balance sheet conditions in the supervisory process. And finally, efficient corporate governance mechanisms can complement the supervisory process and attenuate the risks associated with securitization.