An empirical investigation of the securitization activities in the Malaysian banking industry

Abstract

In the past few decades, the Malaysian banking industry has witnessed drastic changes in its operation due to innovation witnessed in the financial system mainly dominated by securitization activities. Prior to the 2007 financial crisis, securitization has been highly promoted and recommended as an important tool for risk management. However, this financial innovation attracted the attention of the researchers following the events leading to the 2007 credit crisis due to the key roles played by securitization activities. The purpose of this study is to empirically investigate securitization activities of the banks in Malaysia based on the following motives identified in the literature: (1) capital arbitrage motive (2) risk transfer motive and (3) liquidity motive. In addition to that, this study also seeks investigate the effect of this financial innovation on the stability of the banks and banks’ lending. Secondary data spanning from 2004-2011 for 39 Malaysian banks whose data is available on bankscope database is employed in this study. In order to realize the objectives of this study, the Arrelano and Bover (1995) system GMM estimator was employed. Considering the small number of panel in our study, and potential endogeneity, system GMM is deemed suitable for this study. The finding of this study suggested that liquidity and credit risk management constitute the main motive for securitization activities among the Malaysian banks. In addition, in relation to the effect of securitization activities on banks stability, it is revealed that securitization activities pose a potential threat to banks instability. Finally, the study found a significant contribution of securitization to banks’ lending ability.