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Securitization by Banks and Finance Companies: Efficient Financial Contracting or Regulatory Arbitrage?

  • Minton, Bernadette

    (Ohio State U)

  • Sanders, Anthony
  • Strahan, Philip E.

    (Boston College and Wharton Financial Institutions Center)

Registered author(s):

    In this paper, we test two competing explanations for the increasing use of securitization by financial institutions. First, by reducing financial distress costs, securitization lowers the cost of debt finance, particularly for risky and highly levered companies. Second, regulatory distortions in the Basle Capital Accord may create incentives for highly levered banks to securitize assets in order to avoid binding or nearly binding capital requirements. We find that unregulated finance companies and investment banks are much more apt to securitize assets than banks, and that risky and highly levered financial institutions are more likely to engage in securitization than safer ones. At the same time, highly levered banks – banks with low capital ratios – are less likely than better capitalized banks to securitize. Thus, the evidence suggests that securitization is best understood as a contracting innovation aimed at lowering financial distress costs rather than an outgrowth of poorly structured regulations.

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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2004/2004-25.pdf
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    Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2004-25.

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    Date of creation: Oct 2004
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    Handle: RePEc:ecl:ohidic:2004-25
    Contact details of provider: Phone: (614) 292-8449
    Web page: http://www.cob.ohio-state.edu/fin/dice/list.htmEmail:


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    1. Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 389-411, June.
    2. Guenter Franke & Jan Pieter Krahnen, 2005. "Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations," NBER Working Papers 11741, National Bureau of Economic Research, Inc.
    3. Boot, Arnoud W A & Greenbaum, Stuart I & Thakor, Anjan V, 1993. "Reputation and Discretion in Financial Contracting," American Economic Review, American Economic Association, vol. 83(5), pages 1165-83, December.
    4. Higgins, Eric J. & Mason, Joseph R., 2004. "What is the value of recourse to asset-backed securities? A clinical study of credit card banks," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 875-899, April.
    5. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August.
    6. Brent Ambrose & Michael LaCour-Little & Anthony Sanders, 2005. "Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?," Journal of Financial Services Research, Springer, vol. 28(1), pages 113-133, October.
    7. Gary Gorton & Nicholas S. Souleles, 2005. "Special purpose vehicles and securitization," Working Papers 05-21, Federal Reserve Bank of Philadelphia.
    8. Charles W. Calomiris & Berry Wilson, 2004. "Bank Capital and Portfolio Management: The 1930s "Capital Crunch" and the Scramble to Shed Risk," The Journal of Business, University of Chicago Press, vol. 77(3), pages 421-456, July.
    9. Fredric S. Mishkin & Philip E. Strahan, 1999. "What Will Technology Do to Financial Structure?," NBER Working Papers 6892, National Bureau of Economic Research, Inc.
    10. Charles W. Calomiris & Carlos D. Ramirez, 1996. "The Role Of Financial Relationships In The History Of American Corporate Finance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(2), pages 52-73.
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