Internal Asset Transfers and Risk Taking in Financial Conglomerates

Abstract

This paper studies the effect of securitization in financial conglomerates on their risk choice, and compares it with the choice of standalone banks. Loan sales in conglomerates avoid information asymmetry, which enables conglomerate banks to shift worse loan risk to the deposit insurance by selling their best loans to the affilates. However, such a value transfer induces a better asset monitoring by conglomerates enhancing their asset value. Under low capital requirements, conglomerate banks may be safer than standalone banks due to higher monitoring incentives. The model speaks to Vickers proposal of the UK structural reform showing that higher bank capital requirements alone may not offet conglomerate banks’ risk shifting incentives.

Keywords: Securitization, Risk Transfer, Financial Conglomerates, Capital Requirements

JEL Classification: G21, G23, G28