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Effects of Securitization on Banks and the Financial System

In: Securitization: Past, Present and Future

Author

Listed:
  • Solomon Y Deku

    (Nottingham Trent University)

  • Alper Kara

    (Loughborough University)

Abstract

Securitization has significantly changed the traditional role of banks acting as intermediaries between borrowers and depositors. In the traditional bank lending model, banks screen borrowers and extend loans to creditworthy ones. They hold the loans while monitoring borrowers until maturity. In the traditional “originate to hold” model, banks reduce idiosyncratic risks mainly through portfolio diversification and perform the role of delegated monitors for less informed investors (Diamond 1984; Ramakrishnan and Thakor 1984; Bhattacharya and Chiesa 1995; Holmstrom and Tirole 1997). Securitization, on the other hand, allows banks to sell otherwise illiquid loans and off-load part of credit exposure to third parties, and enables them to raise new funds to increase further lending. This model is termed “originate to distribute”.

Suggested Citation

  • Solomon Y Deku & Alper Kara, 2017. "Effects of Securitization on Banks and the Financial System," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Securitization: Past, Present and Future, chapter 5, pages 93-111, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-3-319-60128-1_5
    DOI: 10.1007/978-3-319-60128-1_5
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