The effect of US bank holding companies' exposure to asset-backed commercial paper conduits on the information opacity and systemic risk

- “Securitization itself is not the evil that should be disposed off; the opaqueness associated with securitization is” (Wu and Guo, 2013, p.2).
- The evidence on costs and benefits from engaging in off-balance sheet activities is not conclusive.
- BHCs that provided credit and liquidity enhancement to ABCP conduits were more opaque compared to the BHCs which had no exposure to ABCP programmes.
- Larger opacity significantly increases systemic risk.
- To enhance the efficiency of the financial system, better standardisation of securitisation transactions' and transparency is required.

This paper analyzes information opacity and systemic risk for the U.S. Bank Holding Companies (BHCs) in the context of the asset-backed commercial paper (ABCP) between 2001:Q2 and 2012:Q4. Banks which set up costly ABCP conduits might have benefited from the regulatory capital relief and from providing financing alternatives to their clients. However, BHCs faced costs in terms of the increase in information opacity through the provision of the credit enhancements and liquidity lines to their own and third-party sponsored ABCP conduits, which in turn increased BHCs' systemic risk.