Does nonperforming loan securitization affect credit default swap spreads? Evidence from European banks

We contribute to the growing literature on bank risk management by examining the credit risk implications of nonperforming loan (NPL) management during the period 2012–2020. We construct a unique database with 116 NPL deals by 31 European Union (EU) banks. Our study is motivated by the hypothesis that NPL securitization has a beneficial effect on bank loan quality and that this effect is incorporated in the bank's credit default swap (CDS) spread. Our analysis finds a statistically significant decline in a bank's CDS spread in the days leading up to and shortly after the announcement of an NPL securitization. This suggests that the CDS market views NPL securitization as a de-risking activity and a means of risk mitigation. The impact is even more evident for NPL securitization with a government guarantee which may offer additional credibility to these de-risking activities.