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Securitization and Lending Competition

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  • Frankel, David M.
  • Jin, Yu

Abstract

We study the effects of securitization on interbank lending competition when banks see private signals of local applicants' repayment chances. If banks cannot securitize, the outcome is efficient: they lend to their most creditworthy local applicants. With securitization, banks lend also to remote applicants with strong observables in order to lessen the lemons problem they face in selling their securities. This reliance on observables is inefficient, raises the mean default risk, and may lead to a deceptive rise in credit scores.

Suggested Citation

  • Frankel, David M. & Jin, Yu, 2011. "Securitization and Lending Competition," Staff General Research Papers Archive 34868, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:34868
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fabio Panetta & Alberto Franco Pozzolo, 2018. "Why do banks securitise their assets? Bank-level evidence from over one hundred countries in the pre-crisis period," Temi di discussione (Economic working papers) 1183, Bank of Italy, Economic Research and International Relations Area.
    2. Matthew J. Botsch, 2022. "Public and Private Benefits of Information in Markets for Securitized Assets," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 48(3), pages 319-365, June.
    3. Milonas, Kristoffer, 2017. "The effect of foreclosure laws on securitization: Evidence from U.S. states," Journal of Financial Stability, Elsevier, vol. 33(C), pages 1-22.
    4. Solomon Y. Deku & Alper Kara & David Marques‐Ibanez, 2019. "Trustee reputation in securitization: When does it matter?," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 28(2), pages 61-84, May.
    5. Farruggio, Christian & Uhde, André, 2015. "Determinants of loan securitization in European banking," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 12-27.
    6. Kevin X. D. Huang & Zhe Li & Jianfei Sun, 2021. "Lending Competition And Loan Sales: A Macroeconomic Analysis Under Directed Search," Economic Inquiry, Western Economic Association International, vol. 59(2), pages 648-661, April.
    7. van der Plaat, Mark, 2020. "Loan sales and the tyranny of tistance in U.S. residential mortgage lending," MPRA Paper 107519, University Library of Munich, Germany, revised 20 Apr 2021.
    8. Tsuruta, Daisuke, 2023. "Distant lending for regional small businesses using public credit guarantee schemes: Evidence from Japan," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 60-76.
    9. Bayeh, Antonio & Bitar, Mohammad & Burlacu, Radu & Walker, Thomas, 2021. "Competition, securitization, and efficiency in US banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 553-576.

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    More about this item

    Keywords

    Banks; Securitization; Mortgage Backed Securities; Remote Lending; Internet Lending; Distance Lending; Lending Competition; Signalling; Lemons Problem; Residential Mortgages; Default Risk; Crisis of 2008.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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