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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Foreign exposure to asset-backed securities of U.S. origin
Daniel O. Beltran
Laurie Pounder Demarco
Charles P. Thomas
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.


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Daniel O. Beltran & Laurie Pounder Demarco & Charles P. Thomas, Foreign exposure to asset-backed securities of U.S. origin, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 939, 2008.
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Keywords: Financial crises ; Asset-backed financing ; Mortgage-backed securities
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