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Securitization without adverse selection: The case of CLOs

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  • Benmelech, Efraim
  • Dlugosz, Jennifer
  • Ivashina, Victoria

Abstract

In this paper, we investigate whether securitization was associated with risky lending in the corporate loan market by examining the performance of individual loans held by collateralized loan obligations. We employ two different data sets that identify loan holdings for a large set of CLOs and find that adverse selection problems in corporate loan securitizations are less severe than commonly believed. Using a battery of performance tests, we find that loans securitized before 2005 performed no worse than comparable unsecuritized loans originated by the same bank. Even loans originated by the bank that acts as the CLO underwriter do not show under-performance relative to the rest of the CLO portfolio. While some evidence exists of under-performance for securitized loans originated between 2005 and 2007, it is not consistent across samples, performance measures, and horizons. Overall, we argue that the securitization of corporate loans is fundamentally different from securitization of other assets classes because securitized loans are fractions of syndicated loans. Therefore, mechanisms used to align incentives in a lending syndicate are likely to reduce adverse selection in the choice of CLO collateral.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 106 (2012)
Issue (Month): 1 ()
Pages: 91-113

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Handle: RePEc:eee:jfinec:v:106:y:2012:i:1:p:91-113

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Structured finance; Collateralized loan obligations (CLOs); CDOs; Syndicated loans;

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  1. Benmelech, Efraim & Dlugosz, Jennifer, 2009. "The alchemy of CDO credit ratings," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(5), pages 617-634, July.
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  8. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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  10. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional demand pressure and the cost of corporate loans," Journal of Financial Economics, Elsevier, Elsevier, vol. 99(3), pages 500-522, March.
  11. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional stock trading on loan market information," Journal of Financial Economics, Elsevier, Elsevier, vol. 100(2), pages 284-303, May.
  12. Ivashina, Victoria, 2009. "Asymmetric information effects on loan spreads," Journal of Financial Economics, Elsevier, Elsevier, vol. 92(2), pages 300-319, May.
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  16. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 307-362, February.
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Cited by:
  1. Cerutti, Eugenio & Hale, Galina & Minoiu, Camelia, 2014. "Financial crises and the composition of cross-border lending," Working Paper Series 2014-20, Federal Reserve Bank of San Francisco.
  2. Miguel A. Segoviano Basurto & Bradley Jones & Peter Lindner & Johannes Blankenheim, 2013. "Securitization: Lessons Learned and the Road Ahead," IMF Working Papers 13/255, International Monetary Fund.
  3. Perera, Anil & Ralston, Deborah & Wickramanayake, J., 2014. "Impact of off-balance sheet banking on the bank lending channel of monetary transmission: Evidence from South Asia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 195-216.
  4. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional demand pressure and the cost of corporate loans," Journal of Financial Economics, Elsevier, Elsevier, vol. 99(3), pages 500-522, March.
  5. Ugo Albertazzi & Ginette Eramo & Leonardo Gambacorta & Carmelo Salleo, 2011. "Securitization is not that evil after all," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 796, Bank of Italy, Economic Research and International Relations Area.
  6. Spiros Bougheas, 2012. "Pooling, Tranching and Credit Expansion," CESifo Working Paper Series 3859, CESifo Group Munich.
  7. Roman Inderst & Sebastian Pfeil, 2013. "Securitization and Compensation in Financial Institutions," Review of Finance, European Finance Association, European Finance Association, vol. 17(4), pages 1323-1364.
  8. Yener Altunbas & Michiel van Leuvensteijn & David Marques-Ibanez, 2013. "Competition And Bank Risk: The Role Of Securitization And Bank Capital," Working Papers 13005, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  9. Benjamin J. Keys & Tomasz Piskorski & Amit Seru & Vikrant Vig, 2012. "Mortgage Financing in the Housing Boom and Bust," NBER Chapters, in: Housing and the Financial Crisis, pages 143-204 National Bureau of Economic Research, Inc.

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