Bank Competition, Securitization, and Risky Investment

44 Pages Posted: 18 Jan 2012

See all articles by Zhe Li

Zhe Li

Shanghai University of Finance and Economics - School of Economics

Jianfei Sun

Shanghai Jiao Tong University - Antai College of Economics and Management

Date Written: November 20, 2011

Abstract

We provide a competing theory of why financial intermediaries securitize their assets. We build a dynamic general equilibrium model of bank competition in which banks face a trade-off between the lending rate and the number of potential projects. Competing for projects, banks decrease their lending rate, which in turn results in a low deposit rate. Consequently, the credit supply is insufficient and some high-return projects are not invested. The shortage of credit supply naturally motivates banks to sell their loans through securities in order to invest in the rationed projects. Our paper contributes to the understanding of the occurrence and development of securitization and has important implications on the regulations of securitization.

Keywords: Bank Competition, Directed Search, Capital Requirement, Securitization, Risky Investment

undefined

JEL Classification: E44

Suggested Citation

Li, Zhe and Sun, Jianfei, Bank Competition, Securitization, and Risky Investment (November 20, 2011). Available at SSRN: https://ssrn.com/abstract=1987077 or http://dx.doi.org/10.2139/ssrn.1987077

Zhe Li (Contact Author)

Shanghai University of Finance and Economics - School of Economics ( email )

777 Guoding Road
Shanghai, 200433
China

Jianfei Sun

Shanghai Jiao Tong University - Antai College of Economics and Management ( email )

1954 Huashan Road
Shanghai, Shanghai 200030
China
86 21 52301597 (Phone)

0 References

    0 Citations