The Effect of Using Securitization on the Stability and the Risk of Banks: Evidence From Emerging Countries

Abstract

The purpose of this study is to investigate whether securitization affect financial stability and risk of banks issued from emerging countries during the period 2007 to 2017.

To reach this end we conduct dynamic panel data econometrics with Generalized Methods of Moments (GMM) system on 20 banks issued from emerging countries. The dependent variables are defined by “Bank Stability Index” (BSI) and “logarithm of z-score” and ratios of total risk and credit risk. The independent variables are split into variable of interest (securitization ratio), bank-specific variables (capital adequacy, profitability, on-balance sheet interest rate risk, financial margin, income diversification, liquidity and bank size) and country-specific variables (GDP and inflation).

As major conclusion, we find that using securitization - by banks from emerging countries – enhances their financial stability and minimizes their total risk and credit risk.

As a practical contribution to this work, we suggest that banks' decision-makers in emerging countries increase their use of securitization in order to benefit from its beneficial effect on their financial stability and risks.