Asset securitizations and bank stability: Evidence from different banking systems

The issuance of asset securitization has been subject to a substantial debate by financial regulators and practitioners post the financial crisis of 2008. This study examines the impact of asset securitizations on the performance and financial stability of banks in a dual banking system (Islamic and conventional). Using a unique sample of international banks located in 21 countries, our results provide strong evidence that banks involved in asset securitization are generally riskier and less financially stable. When we comparatively assess the different structures of securitization conditioned on the bank type (i.e. Islamic versus conventional securitization), these two models of asset securitizations show differential effects on bank stability. Unlike conventional securitization, which is marked by significantly low bank stability, an issuance of Islamic securitization leads to lower bank risk. This evidence is prevalent among the two bank types during the financial crisis of 2008–2009 and within non-crisis years. We attribute these findings to the distinctive monitoring and the constraints included in the Islamic model of securitization. The study provides new insights into alternative structures of bank securitization, offering policy implications for regulators governing countries with dual-banking systems.