Credit Risk Transfer Strategies of U.S. Commercial Banks : What Has Changed During the 2007-2009 Crisis?

The aim of this paper is to provide a better understanding of the mechanisms and motivations behind the credit risk transfer (CRT) activity of U.S. commercial banks over the years prior to (2002-2006) and during the recent crisis (2007-2009). Unlike previous literature which is limited to single instruments, we present a comprehensive analysis of the usage of a set of CRT tools. This enables us to draw insights both on: a) the extent to which loan sales, securitization, and credit derivatives are employed as complements or substitutes; b) how the choice among these tools and the dynamics in their usage depend upon specific characteristics of the users. We find that small banks normally use one instrument only (typically loan sales), while large banks tend to use two or more. Securitization and credit derivatives become more common as size increases. Institutions characterized by risky loan portfolios (more concentrated on retail and real estate loans), good lending opportunities, liquidity and capital constraints are more likely to sell or securitize loans. Large and well capitalized banks with less risky loan portfolios mainly concentrated in the commercial and industrial segment are the main net buyers of credit protection. During the crisis, shocks in regulatory capital and liquidity become predominant in explaining the increase in funded instruments for banks of all sizes. Analogously, variations in the credit insurance activity are mainly driven by shocks in regulatory capital. Some evidence of a substitution effect among different instruments is observed during the economic downturn