Does Skin in the Game Change the Behaviour of the Players? An Empirical Study of the Markets for Collateralized Loan Obligations in the U.S. and Europe

Martina Vrzalova & Mona Kamrani

Student thesis: Master thesis


In this Master Thesis we have explained the process of securitization as well as the basic attributes of one of its products, the collateralized loan obligations (CLOs). Further, we have analyzed the regulatory environment around securitization prior and post the big financial crisis of 2007 in Europe and the U.S.. Our interest in regulatory changes, that are related to the financial crisis and focus on securitization, was motivated by the large role that securitization has played in the financial crisis and the fact that it is still a commonly used practice. Based on the analysis of the regulatory environment and the academic research, we have set to examine one of the newly introduced regulations, specifically the European risk retention rule. There seem to be widely held beliefs amongst researchers as well as among regulators, that moral hazard is an issue within securitization, and retaining a fraction of the credit risk of a securitized product should reduce this type of moral hazard. We have conducted two regression analyses, one examining the effects of the European risk retention rule on default rates of the CLOs, and a second regression examining the effects of the rule on the performance of these products. Our findings show that the risk retention rule has a statistically significant effect on both default rates and performance of the CLOs. Not only are the default rates lower for the deals that comply with the risk retention rule, but also their performance is higher as opposed to deals that do not comply with this rule. These facts could be potentially attributed to a decrease of moral hazard on the side of CLO managers or originators stemming from the risk retention. Our results also suggest that there might be an increase of the systematic risk for the CLOs that comply with the risk retention and we believe that this topic is worth investigating further. Our additional suggestions for future research are to examine whether it matters if it is the originator or the manager who retains the risk or whether securitized products as CLOs and collateralized debt obligations (CDOs) can be generalized in the sense that they all require the same rule such as risk retention.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2017
Number of pages107