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We explore whether transparency in banks' securitization activities enhances loan quality. We take advantage of a novel disclosure initiative introduced by the European Central Bank, which requires, as of January 2013, banks that use their asset-backed securities as collateral for repo financing to report securitized loan characteristics and performance in a standardized format. We find that securitized loans originated under the transparency regime are of better quality with a lower default probability, a lower delinquent amount, fewer days in delinquency, and lower losses upon default. Additionally, banks with more intensive loan level information collection and those operating under stronger market discipline experience greater improvement in their loan quality under the new reporting standards. Overall, we demonstrate that greater transparency has real effects by incentivizing banks to improve their credit practices.

This paper documents \"runs\" on asset-backed commercial paper (ABCP) programs in 2007. We find that one-third of programs experienced a run within weeks of the onset of the ABCP crisis and that runs, as well as yields and maturities for new issues, were related to program-level and macro-financial risks. These findings are consistent with the asymmetric information framework used to explain banking panics, have implications for commercial paper investors' degree of risk intolerance, and inform empirical predictions of recent papers on dynamic coordination failures.

The financing costs of green asset-backed securities (ABS) are deeply affected by the increased information asymmetry and greenwashing risk resulting from risk transferring in securitization. To attract potential investors, many ABS issuers obtain external certifications, yet it is unclear whether they pay off financially. Based on a sample of 588 green ABS issued in China for 2016–2022, this paper examines the impact of external certification in the form of green certification and reputation of financial intermediaries involved in the issuance on the yield discount of green ABS over the paired non-green ABS. The empirical findings show that both external certifications lower the greenium of green ABS by serving as favorable signals and mitigating greenwashing concerns, especially in non-financial industry and the securities exchange market. Moreover, the information asymmetry and credit risk of issuers enhance the pricing effect of financial intermediary certification but undermine that of green certification. Our findings provide valuable implications to facilitate the financing efficiency of green financial markets and promote global low-carbon transition.

This study examines whether revolving rating analysts who transition from major rating agencies to issuers are associated with any rating inflation in the issuers’ mortgage-backed securities (MBS) or asset-backed securities (ABS). Using professional profiles posted on LinkedIn to identify revolving rating analysts with structured finance rating experience, we find that the more the issuers employ such analysts, the more likely that ratings of issuers’ MBS and ABS new issuances are inflated compared with otherwise similarly rated securities. Additional analyses show that the impact of revolving rating analysts is more pronounced in complex deals and when the revolving analysts are more senior, indicating that rating expertise in structured finance may play a role in MBS and ABS rating inflation. Finally, we find that at least for AAA-rated MBS and ABS, investors fail to see through the rating inflation associated with revolving rating analysts. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2921 . This paper was accepted by Shivaram Rajgopal, accounting.

Financial institutions, government-sponsored enterprises, and asset-backed security investors are often exposed to delinquency and prepayment risk from large numbers of loans. Examples include mortgages, credit cards, and auto, student, and business loans. Because of the size of the pools, the measurement of these exposures is computationally expensive. This paper develops and tests efficient numerical methods for the analysis of large pools of loans as well as asset-backed securities backed by such pools. For a broad class of statistical and machine learning models of loan-level risk in discrete time, we prove a law of large numbers and a central limit theorem for the pool-level risk. The asymptotics are then used to construct computationally efficient approximations for a large pool. The approximations aggregate the full loan-level dynamics, making it possible to take advantage of the detailed loan-level data often available in practice. We furthermore prove a convergence rate for the approximation and a uniform integrability result. The latter allows the approximation to be applied to a wide class of pool-level risk statistics. To demonstrate the effectiveness of our approach, we implement it on a data set of over 25 million mortgages. The results show the accuracy and speed of the approximation in comparison to brute-force simulation of a pool, for a variety of pools with different risk profiles. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2947 . This paper was accepted by Noah Gans, stochastic models.

This study presents a comparative examination of the performance of green investment portfolios to attain a zero-carbon environment by studying assests-backed securities. Using the portfolio return, the draw ratio, or the ROMAD as measures, the numerical findings. The study intention is to measure and assess the success of green investment portfolios. This will probably include weighing the costs and advantages of several routes toward a carbon-free future, and the major emphasis is on measuring the effectiveness of financial investments in promoting ecological sustainability. The research specifically examines the use of digital finance and asset-backed securities (ABS). This research evaluates the efficacy of these two methodologies in promoting sustainable investments, using relevant scholarly literature and empirical evidence. The study examines many essential indicators, including risk-adjusted returns, carbon footprint reduction, and market stability. The research elucidates the merits and drawbacks of various approaches in fostering ecologically sustainable investments, drawing on case studies and real-world illustrations. The results of this study provide valuable insights into how digital finance and asset-backed securities (ABS) might effectively contribute to the attainment of zero-carbon objectives, all the while maintaining financial stability. This study provides valuable insights for politicians, investors, and financial institutions to make well-informed choices on implementing these initiatives in the context of sustainable development.

We examine how design features and labels of complex financial securities affect pricing and performance. Hence, we utilize the security design features required by the European Union’s Securitization Regulation and the optional STS label (“Simple, Transparent, and Standardized”). Based on a unique dataset of European securitizations with 31 million quarterly loan observations, we find that investors hardly consider the features but rely on the existence of the label, although the latter has no performance-increasing effect. Our results reveal that investors neglect a proper risk assessment and misinterpret the easily accessible label as a signal of superior performance.

We consider a multi-state, general-equilibrium model with collateralized financial promises to study how allowing an asset to back multiple financial contracts (i.e., tranching) affects price bases. A basis emerges when one asset can be tranched to issue more derivative securities than can be backed by another asset. Variations in the ability to tranche an asset or to pyramid derivative debt lead to variations in price bases. Tranching a CDS, as occurs with the CDX index, increases the basis on the underlying asset. Our theory correctly predicts that inclusion in the CDX index increases the underlying CDS basis.

Collateral plays a real role in an economy. Mortgage-backed and asset-backed securities (MBS/ABS) produced by the private sector are imperfect substitutes for Treasuries as collateral. The ratio of MBS/ABS to Treasuries is positively related to financial fragility because privately-produced collateral is risky. We analyze optimal central bank policy in a dynamic game between the central bank and private agents. In equilibrium, the central bank sometimes optimally triggers recessions to reduce systemic fragility.

Asset-backed securities are developed through complex processes such as asset restructuring and credit enhancement. Therefore, the information asymmetry between issuers and investors is greater compared to traditional securities, which imposes higher requirements on information disclosure for asset-backed securities. Asset-backed securities have characteristics such as diversified disclosers, differentiated disclosure content, and specialized risk factors. China has already formulated a series of rules and regulations regarding information disclosure of asset-backed securities. It is imperative to develop specialized laws and regulations for asset-backed securities, encompass original equity holders and credit enhancement agencies as information disclosers, incorporate information such as underlying asset details, cash flow projections, and credit ratings and enhancements into the disclosure content, and improve the legal liability rules to effectively address false disclosures.