Does Securitization of Corporate Loans Lead to Riskier Lending?

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