3.2.1. Explanatory Variables

The bank-specific variables used in our models are based on the literature review. The main regressors in this study include liquidity, risk exposure, capital requirement, and performance. We describe each variable and its expected effect in the following. Variable definitions and a summary of expected relationships are given in Tables 1 and 2.

#### Liquidity

Following discussions in earlier research, this study considers two variables as proxies of the liquidity factor.


According to the previous studies, because securitization involves a bank transforming its illiquid assets into liquid ones, one will expect a bank to be more predisposed to securitize part of its loan portfolio when its liquid assets are restricted. Therefore, liquid assets/deposits and short-term funding are expected to be positively related to the liquidity of a bank, while net loans/deposits and short-term funding are negatively related to it. Overall, the liquidity effect should be negative, since this paper expects weak banks to have greater incentive to be active in the securitization market.

#### Risk Exposure

This paper includes two proxies for the credit risk exposure—the loan loss reserves/total loans ratio and the impaired loans/total loans ratio.


This study assumes that a bank with high credit risks suffers higher financial stress costs and therefore tries to address non-performing loans by securitization rather than by holding them on the balance sheet. Thus, banks with a higher credit risk exposure will securitize a large part of their assets.


#### **Table 1.** Variable definitions and expected relationships.

\* Data source: independent variable data are from Bloomberg, banks' financial reports, and Wind; the transaction volume data is from the China Securitization Analytics website and Wind.

#### Capital Requirement

With respect to the regulatory capital arbitrage hypothesis, this paper uses two proxies for measuring the capital cushion against asset malfunction.


the requirement of Basel III, the minimum tier one was increased to 6%: 4.5% of the common equity tier one (CET1) plus 1.5% of an additional tier one (AT1). According to regulations in China, the minimum tier one capital requirement for systemically important financial institutions is 9.5%, and that for non-systemically important financial institutions is 8.5%.

In line with theoretical arguments, we expect that banks in general holding less regulatory capital will suffer from the pressure of regulatory compliance. Poorly capitalized banks may be generally more prone to realize regulatory capital arbitrage through securitization.


**Table 2.** Variable definitions and expected relationships.

\* Data source: independent variable data are from Bloomberg, banks' financial reports, and Wind; the transaction volume data is from the China Securitization Analytics website and Wind.

#### Performance

The cost-to-income ratio and the return on assets ratio are used to monitor the effect of performance.


It is difficult to expect how performance affects securitization. Previously published studies have not yielded conclusive results in terms of performance.
