Bank Competition, Securitization, and Risky Investment
44 Pages Posted: 18 Jan 2012
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
JEL Classification: E44
Suggested Citation: Suggested Citation
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