Securitization of the U.S. Banking Industry
Securitization is a lucrative business in which illiquid assets such as loans and mortgages are packaged into securities that can be traded on financial markets. It is recognized as a major contributor to the financial crisis. While banks were historically banned from securities markets under Glass–Steagall Act of 1933, they managed to encroach into securities markets through a series of deregulation since the 1980s. Securitization became a legal, viable, and favorable means for banks to boost financial performance and reduce regulatory burden.
This project consists of U.S. bank holding companies from 2001 to 2007. The selection of 2001 as the beginning year has both substantive and technical considerations. First, the Gramm–Leach–Bliley Act of 1999 and the Commodity Futures Modernization Act of 2000 marked the final victory of over two decades of financial deregulation. Banks in the new millennium fully enjoyed the free pass to expand their business lines in a lightly regulated environment. Second, the report of securitization activities by bank holding companies to the Federal Reserve became mandatory since 2001. The second half of 2007 marked the outset of the financial crisis, featured by the collapse of MBS market. Securitization by banks followed a different path since then. Therefore, 2007 is selected as the end of the study. Major data source of this quantitative analysis is the Federal Reserve.
Below provides some descriptive summary statistics of measures of securitization. Data is collected from FR Y-9C form (Consolidated Financial Statements for Bank Holding Companies, commonly known as “Call Report”). The Federal Reserve Bank of Chicago provides raw data of FR Y-9C here.
Fig 1. Holdings of Securities of Bank Holding Companies by Security Type, 2001–07
Fig 2. Holdings of Non-Agency Securities of Bank Holding Companies, 2001–07
Figure 1 documents the longitudinal trend of on-balance sheet holdings of securities of bank holding companies. From 2001 to 2007, total holdings of securities grew from $1,430.23 billion to $2,196.54 billion, or a 53.58% increase. Holdings of agency securities (securities issued by government-sponsored enterprises, notably Fannie Mae and Freddie Mac) made up the majority of total holdings of securities. However, non-agency securities witnessed a more remarkable growth, from $170.30 billion in 2001 to $413.59 billion in 2007, or a 142.86% increase, compared to a 37.50% increase for holdings of agency securities, which can be seen more clear in Figure 2. Note that non-agency securities grew more rapidly after 2004, contributed by the expansion of subprime mortgage market.
Fig 3. Holdings of Agency Securities Scaled by Total Asset by Peer Group, 2001–07
Almost all bank holding companies reported holdings of agency securities from 2001 to 2007. Percentage-wise, oldings of agency securities do not differ much across banks. Figure 3 shows agency securities as a percentage of total assets across peer groups. Peer group is defined by Bank Holding Company Performance Report (BHCPR), BHCPRs divide bank holding companies into several groups according to their assets.
Fig 4. Percentage of Bank Holding Companies with Holdings of Non-Agency Securities by Peer Group, 2001–07
Fig 5. Holdings of Non-Agency Securities Scaled by Total Asset by Peer Group, 2001–07
Holdings of non-agency securities, however, vary. First, not all banks held non-agency securities. According to Figure 4, while around 85% of bank holding companies in Peer Group 1 reported non-agency securities, the percentage drops to around 60% for Peer Group 2, around 45% for Peer Group 3, and around 30% for Peer Group 4. Second, non-agency securities are more concentrated in larger banks. Figure 5 documents non-agency securities as a percentage of total assets across peer groups. In contrast to agency securities (Figure 3), larger banks had significantly higher holdings than smaller banks, percentage-wise.
Fig 6. Outstanding Principal Balance of Securitization Activities of Bank Holding Companies by Underlying Asset, 2001–07
Figure 6 presents yet another measure of securitization: Securitization activities. Note this can be both on- and off-balance sheet. It reports the outstanding principal balance of assets securitized and sold by banks, which witnessed a decrease from $1,299.14 billion in 2001 to $786.42 billion in 2003 before bouncing up. At the year end of 2007, all bank holding companies reported $1,765.60 billion of outstanding principal balance of securitization activities. Figure 6 also shows that securitization activities with underlying asset of mortgages consistently made up the majority of securitization activities from 2001 to 2007, followed by those with underlying asset of credit card receivables.
Fig 7. Percentage of Bank Holding Companies with Securitization Activities by Peer Group, 2001–07
Fig 8. Outstanding Principal Balance of Securitization Activities Scaled by Total Asset by Peer Group, 2001–07
Not all banks engage in securitization activities. Figure 7 shows that while most of the bank holding companies in Peer Group 1 engaged in securitization activities, very few in Peer Groups 2, 3, and 4 reported securitization activities from 2001 to 2007. However, unlike holdings of non-agency securities (Figure 5), Figure 8 does not demonstrate a clear relationship between bank size and relative size of securitization activities. Instead, it shows a fluctuating pattern both across peer groups and over years.