Professor Xu speaks to CNBC about SLABS.
Xiaoqing Eleanor Xu, Ph.D., CFA, professor of finance, in the Stillman School of Business, was asked in an interview with CNBC to share her expertise around a heatedly debated topic in the financial world today.
Fears of another securities market bubble have been building around the potential
systemic risk to the American economy concerning billions of dollars in student loans
that have been packaged and sold to investors as student loan asset-backed securities,
commonly known as SLABS.
CNBC inquired if SLABS would be the catalyst for the next big financial bubble or trigger
the next financial crisis.
Professor Xu said, “My Answer is no, absolutely not.” She explained, “While US student
loans outstanding has reached an alarming $1.76 trillion, it is crucial to note that
90 percent of these loans are federal direct student loans with securitization. The
market for SLABS, or student loan asset-backed securities, has an outstanding size
of less than $150 billion, which means that less than 9 percent of the outstanding
student loans have been securitized. There is often confusion between student loans,
which have a staggering $1.67 trillion outstanding, and SLABS, a relatively smaller
market with less than $150 billion outstanding. Given its current size, both in absolute
and relative terms, the SLABS market is considered too small to pose any systemic
risk to the broader financial market.”
In fact, Professor Xu conducted in-depth research on a similar topic and published
a research article titled “Student Loan Asset-Backed Securities: The Next Market in Crisis?” in the Fall 2020 issue of the Journal of Fixed Income. The study examines the details of SLABS security structure, pool characteristics,
and performance. The research showed that the strong internal credit enhancements,
in the form of excess spread, overcollateralization, and subordination, and external
guarantees that have been put in place aggressively for SLABS after the subprime mortgage
crisis of 2007-2008 have substantially reduced the systemic risk of the SLABS sector.
“In the CNBC interview, I emphasize that asset securitization, such as mortgage-backed
securities (MBS) and student loan asset-backed securities (SLABS), originally emerged
as a positive financial innovation aimed at enhancing the efficient channeling of
credit from those who have surplus to those who are in need. I also acknowledge that
there is a lot more to be done to enhance market transparency and promote financial
literacy and education among borrowers and investors to ensure the healthy contribution
of securitization to the financing of our nation’s private student loans.”
Professor Xu told CNBC viewers:
“I think to say this SLABS market is going to be the trigger of the next financial
crisis is really overstated,” explaining that following the 2007-2008 global financial
crisis, increased credit enhancement was put in place to protect against that exact
scenario. She said, “Even if there are substantial charge-offs, they’re mostly going
to be absorbed within the internal and external credit enhancement measures that have
been put forth very aggressively after the financial crisis.”
Professor Xu’s latest research includes exchange-traded funds, fixed income, cryptocurrency,
sustainable investing, emerging markets, hedge funds and risk management. She has
taught undergraduate and graduate courses in Investment Analysis, Security Analysis,
and Fixed Income Analysis, while also publishing more than 40 research articles in
highly respected, peer-reviewed finance journals. She chaired the Finance Department
from 2008 to 2010 and has been directing the CFA university affiliation programs since
2013. Prior to joining Seton Hall University, Dr. Xu taught at the Chaifetz School
of Business at Saint Louis University. She received her Ph.D. in Finance from Syracuse
To learn more about SLABS news, video, and research highlighted in this article, please
CNBC News: “Here’s why some economists are concerned student loans may cause the next big bubble”
CNBC Video: “How Student Loans Are Sold To Wall Street”
Xiaoqing Eleanor Xu and Miki Ortiz-Eggenberg, “Student Loan Asset-Backed Securities: The Next Market in Crisis?” The Journal of Fixed Income, Volume 30, Issue 2, pp. 22-43, Fall 2020.
For links to Professor Xu’s insightful research on mortgage-backed securities that
provided guidance to investors and financial market participants on the risk and return
of residential and commercial MBS even before the 2007-2008 global financial crisis,
“What Moves the Mortgage-backed Securities Market?” Real Estate Economics, 33(2), 397-426, June 2005.
“What Drives the Return on CMBS?” Journal of Portfolio Management, 33(5), 145-157, September 2007.
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