NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Jan Pieter Krahnen

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NBER Working Papers and Publications

January 2007Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations
with Gunter Franke
in The Risks of Financial Institutions, Mark Carey and René M. Stulz, editors
November 2005Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations
with Guenter Franke: w11741
This paper contributes to the economics of financial institutions risk management by exploring how loan securitization affects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to expand its loan business, thereby affecting systematic risk. For a sample of European CDO issues, we find an increase of the banks%u2019 betas, but no significant stock price effect around the announcement of a CDO issue.

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