The Securitization Flash Flood

Abstract

If securitization represents risk transfer, why did banks continue to hold opaque securitizations on their books? This paper argues such holdings were used as collateral for the creation of money-like claims, providing evidence consistent with the view of banks as producers of debt. Using a natural experiment and hand-collected data on over 4,700 repurchase contracts, the paper establishes a connection between the rise of securitization holdings and the use of collateral in short-term debt markets. In the backdrop of the financial crisis, the paper's finding highlights a trade-off between creating bank money and financial stability.

Keywords: BAPCPA, securitization, repo markets, bank holding companies

JEL Classification: G21, G23