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Securitization, competition and monitoring

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  • Ahn, Jung-Hyun
  • Breton, Régis

Abstract

We analyze the impact of loan securitization on competition in the loan market. Using a dynamic loan market competition model where borrowers face both exogenous and endogenous costs to switch between banks, we uncover a competition softening effect of securitization that allows banks to extract rents in the primary loan market. By reducing monitoring incentives, securitization mitigates winner’s curse effects in future stages of competition thereby decreasing ex ante competition for initial market share. Due to this competition softening effect, securitization can adversely affect loan market efficiency while leading to higher equilibrium profits for banks. This effect is driven by primary loan market competition, not by the exploitation of informational asymmetries in the secondary market for loans. We also argue that banks can use securitization as a strategic response to an increase in competition, as a tool to signal a reduction in monitoring intensity for the sole purpose of softening ex ante competition. Our result suggests that securitization reforms focusing exclusively on informational asymmetries in markets for securitized products may overlook competitive conditions in the primary market.

Suggested Citation

  • Ahn, Jung-Hyun & Breton, Régis, 2014. "Securitization, competition and monitoring," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 195-210.
  • Handle: RePEc:eee:jbfina:v:40:y:2014:i:c:p:195-210
    DOI: 10.1016/j.jbankfin.2013.11.023
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    3. Zhang, Qingjun & Chen, Si & Jin, Yi, 2020. "The impact of off-balance-sheet regulations on bank risk-taking: Evidence from China," Research in International Business and Finance, Elsevier, vol. 54(C).
    4. Helder Ferreira de Mendonça & Vívian Íris Barcelos, 2021. "Securitization of assets and risk transfer in a large emerging market: Evidence from Brazil," Bulletin of Economic Research, Wiley Blackwell, vol. 73(4), pages 580-605, October.
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    6. Li, Zhe & Sun, Jianfei, 2011. "Bank competition, securitization and risky investment," MPRA Paper 34173, University Library of Munich, Germany.
    7. van der Plaat, Mark & Spierdijk, Laura, 2020. "Recourse, asymmetric information, and credit risk over the business cycle," MPRA Paper 104718, University Library of Munich, Germany.
    8. Gürtler, Marc & Koch, Florian, 2021. "Multidimensional skin in the game," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    9. Chen, Zhizhen & Liu, Frank Hong & Opong, Kwaku & Zhou, Mingming, 2017. "Short-term safety or long-term failure? Empirical evidence of the impact of securitization on bank risk," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 48-74.
    10. 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.
    11. Marco Migliorelli & Philippe Dessertine, 2017. "Time for new financing instruments? A market-oriented framework to finance environmentally friendly practices in EU agriculture," Post-Print halshs-02103991, HAL.
    12. Altunbas, Yener & van Leuvensteijn, Michiel & Marqués-Ibáñez, David, 2014. "Competition and bank risk: the effect of securitization and bank capital," Working Paper Series 1678, European Central Bank.

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    More about this item

    Keywords

    Securitization; Loan sales; Banking competition; Monitoring; Rent extraction;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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