The Securitization Flash Flood
50 Pages Posted: 27 Jul 2016 Last revised: 26 Oct 2017
Date Written: August 25, 2017
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 issue securitized products. 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 over 900 repurchase contracts from S.E.C N-Q filings reveals underwriters of securitized products increased use of mortgage-based repos in the months 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