The Securitization Flash Flood
40 Pages Posted: 27 Jul 2016 Last revised: 21 Jun 2019
Date Written: June 20, 2019
What caused the flood of securitized products in the years immediately preceding the crisis? This paper presents evidence that demand for safe collateral in repo markets made it attractive for financial institutions to hold mortgage-backed securities and classify them as liquid. Using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) as a natural experiment that shocked the demand for collateral in repo markets, this paper establishes collateralized borrowing in short-term debt markets as a contributing factor to the rise of mortgage securitization. Hand-collected data on nearly 2,000 contracts from the triparty repo market reveals large financial institutions increased use of mortgage-based repos following the law change. The evidence provides a direct test of liability-centric theories of banking that link the money creation function of financial intermediaries to the balance sheet holdings of liquid assets (Hanson et al. (2015)).
Keywords: BAPCPA, securitization, repo markets, bank holding companies
JEL Classification: G21, G23
Suggested Citation: Suggested Citation