Securitization of Small Business Loans
This paper assesses the potential impact of securitization in improving small businesses’ access to credit. It begins by examining the nature of small business lending and the factors that make banks the primary providers of credit to small businesses. The paper then examines the conditions under which the benefits of securitization are fully realized and whether the nature of small business lending satisfies those conditions. We argue that certain characteristics of small firm finance, especially information problems and the need for ongoing monitoring, are likely to mitigate the full benefits of securitization, that is, the substantial funding cost advantages. Specifically, loan buyers will demand substantial levels of loss protection to compensate for their uncertainty over the returns on the underlying credits and to leave intact the seller’s incentive to monitor properly the loans sold. Loss protection, however, will reduce or eliminate any funding cost advantages, including capital cost reductions. In the absence of lower funding costs, banks are unlikely to undertake substantial new lending to small businesses. Securitizations of small business loans could still take place, but they are likely to be undertaken for special purposes rather than as a primary funding mechanism.
Volume (Year): 4 (1995)
Issue (Month): 1 (Spring)
|Contact details of provider:|| Postal: 24255 Pacific Coast Hwy, Malibu CA|
Web page: http://bschool.pepperdine.edu/jef
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lawrence M. Benveniste & Allen N. Berger, 1987. "Securitization with recourse: an instrument that offers uninsured bank depositors sequential claims," Research Papers in Banking and Financial Economics 97, Board of Governors of the Federal Reserve System (U.S.).
- Pennacchi, George G, 1988.
" Loan Sales and the Cost of Bank Capital,"
Journal of Finance,
American Finance Association, vol. 43(2), pages 375-396, June.
- George Pennacchi, "undated". "Loan Sales and the Cost of Bank Capital," Rodney L. White Center for Financial Research Working Papers 07-87, Wharton School Rodney L. White Center for Financial Research.
- George Pennacchi, "undated". "Loan Sales and the Cost of Bank Capital," Rodney L. White Center for Financial Research Working Papers 7-87, Wharton School Rodney L. White Center for Financial Research.
- James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
- Gregory E. Elliehausen & John D. Wolken, 1990. "Banking markets and the use of financial services by small and medium- sized businesses," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 801-817.
- Gregory E. Elliehausen & John D. Wolken, 1990. "Banking markets and the use of financial services by small and medium- sized businesses," Staff Studies 160, Board of Governors of the Federal Reserve System (U.S.).
- Greenbaum, Stuart I. & Thakor, Anjan V., 1987. "Bank funding modes : Securitization versus deposits," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 379-401, September.
- Mark S. Carey & Stephen D. Prowse & John Rea & Gregory F. Udell, 1993. "The economics of the private placement market," Staff Studies 166, Board of Governors of the Federal Reserve System (U.S.).
- Benveniste, Lawrence M. & Berger, Allen N., 1987. "Securitization with recourse : An instrument that offers uninsured bank depositors sequential claims," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 403-424, September.
- Katerina Simons, 1993. "Why do banks syndicate loans?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 45-52.
- Booth, James R., 1992. "Contract costs, bank loans, and the cross-monitoring hypothesis," Journal of Financial Economics, Elsevier, vol. 31(1), pages 25-41.
- Ram T. S. Ramakrishnan & Anjan V. Thakor, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 415-432.
- Charles T. Carlstrom & Katherine A. Samolyk, 1993. "Examining the microfoundations of market incentives for asset-backed lending," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 27-38.
- Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:pep:journl:v:4:y:1995:i:1:p:1-29. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Craig Everett)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.