Credit risk transfer in U.S. commercial banks: what changed during the 2007–2009 crisis?

Following the debate on the role played by credit risk transfer (CRT) in exacerbating the 2007-2009 crisis, this paper investigates usage and effects of loan sales, securitization and credit derivatives in U.S. commercial banks over the last decade, with a special emphasis on the financial crisis. We find that, in times of severe funding constraints, the need to raise financial resources becomes the principal incentive behind CRT. On the positive side, we document some beneficial effects of CRT on the economy, as the funds released throughCRT are subsequently invested by banks to sustain credit supply, also in recession. On the negative side, we report higher overall riskiness in banks who engage intensively in loans sales and securitization, which translates into higher default rates during the crisis. Interestingly, benefits and drawbacks of CRT are much stronger for loan sales and securitization than for credit derivatives.