Securitization and Bank Performance
29 Pages Posted: 20 Oct 2009 Last revised: 11 Mar 2020
Date Written: October 19, 2009
Theory suggests that securitization provides financial institutions with an opportunity to lower the cost of funding; improve credit risk management and increase profitability. In practice, as evidence during the recent crisis, it might lead to adverse consequences through a number of indirect channels. Therefore, the net impact of securitization on bank performance is ambiguous. This study aims to evaluate whether banks improve their performance through the use of securitization markets by applying a propensity score matching approach. In other words, we build a counterfactual group of banks to assess what would have happened to the securitizing banks had they not securitized. Using US commercial banking data from 2001 to 2008, univariate analysis indicates that securitizing banks are, on average, more profitable institutions, with higher credit risk exposure and higher cost of funding. However, the propensity score matching analysis does not provide evidence of significant causal effects of securitization on the performance of banks. Therefore, securitization does not seem to outperform alternative funding, risk management and profitability improvement techniques. Our evidence raises important questions about banks motives for increasing securitization activities and consequent implications for banking systems.
Keywords: Securitization, Bank Performance, Propensity Score Matching
JEL Classification: G21, G32
Suggested Citation: Suggested Citation