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• Working Paper | HBS Working Paper Series | 2012

  Dollar Funding and the Lending Behavior of Global Banks

  Victoria Ivashina, David S. Scharfstein and Jeremy C. Stein

  A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing the funding provided to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending.

  Keywords: banks; global banks; credit supply; dollar funding;

  Citation:

  Ivashina, Victoria, David S. Scharfstein, and Jeremy C. Stein. "Dollar Funding and the Lending Behavior of Global Banks." Harvard Business School Working Paper, No. 13–059, October 2012. (NBER Working Paper Series, No. 18528, October 2012.)

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• Case | HBS Case Collection | 2012

  TPG China: Daphne International

  Victoria Ivashina

  Citation:

  Ivashina, Victoria. "TPG China: Daphne International." Harvard Business School Case 813-055, October 2012.

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• Article | Journal of Financial Economics | October 2012

  Securitization without Adverse Selection: The Case of CLOs

  Effi Benmelech, Jennifer Dlugosz and Victoria Ivashina

  In this paper, we investigate whether securitization was associated with risky lending in the corporate loan market by examining the performance of individual loans held by CLOs. We employ two different datasets that identify loan holdings for a large set of CLOs and find that adverse selection problems in corporate loan securitizations are less severe than commonly believed. Using a battery of performance tests, we find that loans securitized before 2005 performed no worse than comparable unsecuritized loans originated by the same bank. Even loans originated by the bank that acts as the CLO underwriter do not show underperformance relative to the rest of the CLO portfolio. While there is some evidence of underperformance for securitized loans originated between 2005 and 2007, it is not consistent across samples, performance measures, and horizons. Overall, we argue that the securitization of corporate loans is fundamentally different from securitization of other asset classes because securitized loans are fractions of syndicated loans. Therefore, mechanisms used to align incentives in a lending syndicate are likely to reduce adverse selection in the choice of CLO collateral.

  Keywords: Personal Finance; Performance; Markets; Banks and Banking; Debt Securities; Investment Portfolio; Financing and Loans;

  Citation:

  Benmelech, Effi, Jennifer Dlugosz, and Victoria Ivashina. "Securitization without Adverse Selection: The Case of CLOs." Journal of Financial Economics 106, no. 1 (October 2012): 91–113.

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