NPLs Securitizations, CDS Spreads and Spillover Effect: Evidence from the European Banking System

Using an original bank-level dataset, we test the impact and the spillover effect of non-performing loans (NPLs) securitization announcements on the Credit Default Swap (CDS) spreads of EU banks. We construct a dataset that includes information about NPLs announcements and NPLs securitization characteristics. The final dataset contains 116 NPLs securitization announcements over the period 2012–2020. We find that the NPLs securitization is a credible mechanism for Global Systemically Important Institutions (G-SII) to engage in de-risking activities. The use of a State-backed guarantee reduces the cost of financing and the risk of the ceded loans is incorporated into the CDS spreads. Finally, we find evidence of a spillover effect after the announcement of an NPLs securitization by a G-SII bank. Our results show that the size of the spillover effect is influenced by the banks’ involvement in the NPLs market.