Article Title

The ‘Security Pacific Letter’: Estimating the causal effect of securitization on banks’ systemic exposure

Authors

Paul-Angelo dell'Isola, Columbia UniversityFollow

Abstract

This paper aims to test the hypothesis of the ‘Safe Asset narrative’

which states that banks became manufacturers of pseudo safe assets to meet

a global shortage of safe assets in the pre-crisis period. In this narrative,

securitization is the mechanism which enables banks to become underwriters

of safe assets. This paper takes this hypothesis to the data and attempts to

estimate the causal effect of securitization on banks’ systemic exposure. In

particular, this paper exploits a regulatory change that occurred in 1987 when

the OCC expanded the scope of assets US national banks could securitize. By

using state-chartered banks as a control group and estimating a diff-and-diff

model, I find that securitization significantly increased banks’ systemic

exposure. I then provide evidence on changes of banks’ balance sheet features

to pinpoint a direct channel through which securitization may have increased

banks’ systemic exposure.

Recommended Citation

dell'Isola, Paul-Angelo (2022) "The ‘Security Pacific Letter’: Estimating the causal effect of securitization on banks’ systemic exposure," Dartmouth Undergraduate Journal of Politics, Economics and World Affairs: Vol. 1: Iss. 2, Article 4.
Available at: https://digitalcommons.dartmouth.edu/dujpew/vol1/iss2/4