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Securitization of Small Business Loans

Author

Listed:
  • Christopher P. Beshouri

    (US Office of Comptroller of the Currency)

  • Peter J. Nigro

    (US Office of Comptroller of the Currency)

Abstract

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.

Suggested Citation

  • Christopher P. Beshouri & Peter J. Nigro, 1995. "Securitization of Small Business Loans," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 4(1), pages 1-29, Spring.
  • Handle: RePEc:pep:journl:v:4:y:1995:i:1:p:1-29
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    File URL: http://jefsite.org/RePEc/pep/journl/jef-1995-04-1-a-beshouri.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    3. 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.
    4. Katerina Simons, 1993. "Why do banks syndicate loans?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 45-52.
    5. 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.
    6. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    7. 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.
    8. 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.).
    9. 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.).
    10. 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.
    11. Booth, James R., 1992. "Contract costs, bank loans, and the cross-monitoring hypothesis," Journal of Financial Economics, Elsevier, vol. 31(1), pages 25-41.
    12. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Small Business Loans; Lending; Borrowing; Small Business; Securitization;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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