Do Lenders Still Monitor When They Can Securitize Loans?

Abstract:     
Securitization through collateralized loan obligations has become an important source of credit for corporations during the past decade. This paper examines the implication of corporate loan securitization on banks’ roles as monitors. We find that banks that are active in securitization markets and hence more inclined to distribute their loans to securitization facilities impose less restrictive covenants at loan origination. Following the origination, these banks’ borrowers experience a greater increase in their asset risk than borrowers of non-securitization-active banks. Furthermore, following violation of loan covenants, securitization-active banks are more likely to grant a waiver without changing any loan contract terms. Our findings are robust to controlling for firms’ endogenous choices to borrow from securitization-active banks that may have relaxed their ex-ante screening criteria. They suggest that banks also exert less effort in ex-post monitoring after granting loans in anticipation of loan securitization. They further highlight the disintermediation effect of securitization in corporate lending.

Number of Pages in PDF File: 51

Keywords: Securitization, Monitoring, Collateralized Loan Obligations, Risk-taking, Covenants

JEL Classification: G31, G21, G32

working papers series