TY  - JOUR
AU  - Franke, Guenter
AU  - Krahnen, Jan Pieter
TI  - Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11741
PY  - 2005
Y2  - November 2005
DO  - 10.3386/w11741
UR  - http://www.nber.org/papers/w11741
L1  - http://www.nber.org/papers/w11741.pdf
N1  - Author contact info:
Guenter Franke
Fachbereich Wirtschaftwissenschaften
University of Kanstanz
Fach D 147
D-78457 Konstanz  GERMANY
Tel: +49 7531 88 2545
Fax: +49 7531 88 3559
E-Mail: guenter.franke@uni-konstanz.de

Jan Pieter Krahnen
E-Mail: krahnen@wiwi.uni-frankfurt.de
M1  - published as Gunter Franke, Jan Pieter Krahnen. "Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations ," in Mark Carey and René M. Stulz, editors, "The Risks of Financial Institutions" University of Chicago Press (2006)

AB  - 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.
ER  -