Do Lenders Still Monitor When They Can Securitize Loans?
University of Texas at Dallas - Naveen Jindal School of Management
November 26, 2013
Review of Financial Studies, Forthcoming
We examine how securitization markets affect the role of banks as monitors in corporate lending. We find that banks active in securitization impose looser covenants on borrowers at origination. After origination, these borrowers take on substantially more risk than borrowers of non-securitization-active banks. We use borrowers’ geographic locations to instrument for borrower-lender matching to distinguish the effect of securitization on the banks’ ex-post monitoring from its effect on ex-ante screening. We further investigate direct evidence of banks’ monitoring role by examining their actions following covenant violations, and find that securitization-active lenders are more likely to grant waivers without changing loan terms. Our results suggest that banks exert less effort on ex-post monitoring when they can securitize loans.
Number of Pages in PDF File: 67
Keywords: Securitization, Monitoring, Collateralized Loan Obligations, Risk-taking, Covenants
JEL Classification: G31, G21, G32
Date posted: March 23, 2011 ; Last revised: December 7, 2013