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.
"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:
2, Article 4.
Available at: https://digitalcommons.dartmouth.edu/dujpew/vol1/iss2/4