**5. Discussion**

#### *5.1. Discussion of Results*

This paper investigates what drives bank securitization in China and compares determinants before and after 2017Q4. Generally, the paper shows that, before 2017Q4, a bank was more likely to issue securities if the bank's credit risk exposure, its liquidity, and its performance were higher. A bank's credit risk was still a main driver of securitization issuance volume. The regulatory capital arbitrage also influenced securitization decisions. However, the liquidity and performance were not determinants of securitization issuance after 2017Q4. Specifically, credit risk exposure was the most significant determinant compared to the other two. The main motivation of bank securitization could have been credit risk transfers, followed by increased liquidity and improved profitability. Interestingly, capital requirement—or, more precisely, (5) the total equities to total assets and (6) the tier one ratio—did not seem to influence banks' securitization decisions very strongly before 2017Q4. However, these two variables were statistically significant with respect to securitization issuance after 2017Q4. Liquidity—or, more precisely, (1) net loans to deposits and short-term funding and (2) liquidity assets to deposits and short-term funding—did not seem to influence banks' securitization decisions very strongly. (5) The cost-to-income ratio and (6) the return on assets also did not seem to influence banks' securitization decisions strongly after 2017Q4.

The paper also shows that the four determinants in different types of banks display different propensities toward securitization activities in the two periods. To differentiate motivations of securitization between the varying types of banks, this paper looks particularly at the varying types of bank groups in more detail. Before 2017Q4, two types of bank group (the commercial bank group and the national commercial bank group) were used in the empirical models. The findings indicate that risk exposure was still the most important determinant, which is the case in all banks. The (3) loan loss reserves to total loans and (4) the impaired loans to total loans, measuring credit risk exposure, presented statistical significance in the group of commercial banks. Additionally, credit risk exposure affected bank securitization more obviously—the coefficients of (3) and (4) were much higher than those of the other determinants. The second important determinant that drives

banks' securitization was liquidity. (1) The net loans to deposits and short-term funding were statistically significant with respect to securitization transaction volumes, except in the group of national commercial banks. However, because the *p*-values and coefficients of the liquidity variables were lower than those of risk exposure, the liquidity determinant was not as important. The profitability determinant also drove securitization transactions in all commercial banks but was less important than the above two determinants, which is shown by the lower *p*-values of profitability. Consistent with the results of all banks, the capital requirement determinant was considered the least important determinant. It is only related to securitization issuance in the group of national commercial banks. After 2017Q4, the all-bank group and the national commercial bank group were the only two groups that issued their securities because of the risk exposure. However, the capital requirement determinant was found to be related to securitization issuance in the group of all banks.

Risk exposure is the most important determinant for bank securitization, by bank group analysis and by different types of bank analysis, for the whole period. Higher credit risks in a bank has motivates a larger part of an asset-securitized portfolio, and these securitized assets are more likely to be low-quality or impaired loans. This is because the bank is able to decrease stress costs and improve risk management when it removes these low-quality or impaired loans from the balance sheet via securitization transactions and shares those credit risks with investors. Thus, these findings are indicative that securitization is mainly used as a risk transfer. Liquidity was the second most important determinant before 2017Q4, but it was not the determinant after 2017Q4. The use of securitization is regarded as a mechanism in the search for liquidity and, therefore, as a source of additional financing. In this way, banks can newly acquire alternative funding resources and be less vulnerable to liquidity shock. The other important determinant is profitability. The first period indicates that securitization was used as a way to improve performance. Generally, that performance mainly came from intermediation profits via a specific design of securitization loans or by raising cash inflows to retire existing debts that could reduce interest expense. However, improving a bank's performance via securitization issuance could be more difficult after 2017Q4. The capital requirement did not seem to influence banks' securitization (except national commercial banks in the first period), but this changed after 2017Q4. It can be stated that regulatory capital arbitrage hampered by the regulatory scheme was difficult to apply in the securitization market, but that has changed in the last three years.
