There is no clear evidence regarding the effect of securitization transactions on the risk in the financial system. The literature about this subject is incipient for emerging economies and, in particular, for Latin American countries. A possible justification for this fact can be a lack of a developed financial system in these countries.
A recent paper by de Mendonça and Barcelos (2015) addresses empirical evidence, based on the Brazilian experience, in order to observe if there is some effect of the securitization transactions on credit risk and also whether credit risk stimulates securitization. The findings indicate that securitization transactions imply an increase in the credit risk whereas credit risk is not relevant to explain securitization in Brazil.
I came across a paper that argues that the effect of securitization on credit risk depends on the type of underlying assets. Securitization of mortgages, equity lines of credit and consumer loans reduce credit risk, but other types of assets appear not to have any significant impact on credit risk. See Casu et al (2011) Does securitization reduces credit risk taking? Empirical Evidence from US bank holding companies. The European Journal of Finance, 17(9-10), 769-788.
Securitization of mortgages reduces credit risk? Surely this depends on multiple factors, one of which must be the underwriting quality of the underlying loan? By risk in the financial system are we talking about systemic risk? Securitization can't be studied in isolation as you need to consider other financial instruments (such as Credit Default Swaps) commonly used as part of the process.
Hi!
if credit risk is transferred by selling (securitizing) a loan, the bank's incentive to credit-screen and monitor declines. Keys and al (2010) QJE find that securitized pools of subprime loans had default rates hat were 10% to 25% higher than similar mortgages that were not securitized. Elul (2011) present additional evidence consistent with reduced screening of securitized mortgages.
If investors in mortgage and asset-backed Securities recognize the loan-selling bank's suboptimal-screening, they should discount the value of securitizred loans, forcing the bank to internalize this inefficiency.
In others words, a bank de cision to sell or retain a loan would weight the economic benefits of risk transfer against the economic costs of inefficient screening. (see Han and al (2015) Journal of finance.
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https://www.researchgate.net/publication/286256177_Global_Financial_Crisis_Exploring_the_Special_Role_of_US_Banks_and_Regulations
Article Global Financial Crisis: Exploring the Special Role of U.S. ...
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