Does Securitization of Corporate Loans Lead to Riskier Lending?

Journal of Money Credit and Banking 47(2-3), 415-444, 2015.

39 Pages Posted: 18 May 2011 Last revised: 18 Jan 2021

See all articles by Vitaly Bord

Vitaly Bord

Federal Reserve Board

João A. C. Santos

Federal Reserve Bank of New York; Nova School of Business and Economics

Date Written: March 2, 2014

Abstract

We investigate whether the securitization of corporate loans affected banks’ lending standards. We find that during the boom years of the CLO business, loans sold to CLOs at the time of their origination underperform matched unsecuritized loans originated by the same bank. This finding is robust to loan- and borrower-specific controls, as well as the lender’s skin in the game. Banks’ use of lax underwriting standards appears to have contributed to the worse performance of the loans they sell to CLOs. We find that banks put less weight on the hard information on borrower risk available to them when they set interest rates on the loans they sell to CLOs, and that they retain less skin in the game on these loans. We also find that the median non-CLO syndicate participant retains a lower stake in securitized loans when compared to loans that are not securitized, suggesting that these investors, like lead banks, expected securitized loans to perform worse.

Keywords: Securitization, CLOs, Loan Performance, Loan Spreads

JEL Classification: G21, G23

Suggested Citation

Bord, Vitaly and Santos, João A. C., Does Securitization of Corporate Loans Lead to Riskier Lending? (March 2, 2014). Journal of Money Credit and Banking 47(2-3), 415-444, 2015., Available at SSRN: https://ssrn.com/abstract=1838383 or http://dx.doi.org/10.2139/ssrn.1838383

Vitaly Bord

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
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João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: http://HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

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