Working Paper
Foreign exposure to asset-backed securities of U.S. origin
Abstract: The financial turmoil which began in August 2007 originated, in part, because investors reassessed the quality of the assets underlying many asset-backed securities (ABS), particularly U.S. mortgages. The prominence of European banks in the early stages of the turmoil created the perception that foreigners held an outsized share of risky U.S. securities and prompted questions of why Europeans were so exposed. This paper evaluates that perception by quantifying foreign exposure to ABS with U.S. underlying collateral. Using the latest survey data on foreign portfolio holdings of U.S. securities, we find that the ultimate losses that foreigners could incur arising from U.S. underlying assets are small relative to most scale variables, although initial total mark-to-market losses are estimated to be significantly larger. Among other reasons for this difference between ultimate and initial losses, we demonstrate that the securitization chain can amplify mark-to-market price declines in the presence of uncertainty or illiquidity. Finally, we show that, relative to the size of the market, foreigners' holdings of U.S. mortgage-backed securities do not appear to be elevated compared with their holdings of other U.S. assets.
Keywords: Financial crises; Asset-backed financing; Mortgage-backed securities;
Access Documents
File(s): File format is text/html http://www.federalreserve.gov/pubs/ifdp/2008/939/default.htm
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/ifdp/2008/939/ifdp939.pdf
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: International Finance Discussion Papers
Publication Date: 2008
Number: 939