Securitization, Ratings, and Credit Supply

58 Pages Posted: 20 Mar 2017  

Brendan Daley

Duke University - Fuqua School of Business

Brett S. Green

University of California, Berkeley - Haas School of Business

Victoria Magdalena Vanasco

Stanford University

Date Written: March 19, 2017

Abstract

We explore the effect of credit ratings on loan origination and securitization. The model involves two stages: first, banks decide whether to originate a given loan pool or not, and obtain private information about the pools originated. Second, each bank chooses what portion of the pool’s cash flow rights to retain and what portion to securitize. All securities are rated and sold to competitive investors. We characterize how credit ratings affect the trade-off between productive efficiency (i.e., efficiency of the origination process) and allocative efficiency (i.e., efficiency of the securitization process). In particular, we show that credit ratings increase allocative efficiency by reducing costly retention and increase the supply of credit, but reduce average quality of loans originated and can lead too an oversupply of credit relative to first best. These findings are in contrast to regulators view of credit ratings as a disciplining device. We consider extensions of the model to allow for rating shopping and manipulation. Provided investors are fully rational, shopping/manipulation have effects similar to reducing the informativeness of ratings.

Keywords: Asset-Backed Securitization, Credit Ratings, Credit Supply

JEL Classification: G01, G21, G28

Suggested Citation

Daley, Brendan and Green, Brett S. and Vanasco, Victoria Magdalena, Securitization, Ratings, and Credit Supply (March 19, 2017). Stanford University Graduate School of Business Research Paper No. 17-26. Available at SSRN: https://ssrn.com/abstract=2937297

Brendan Daley

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Brett S. Green (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

2220 Piedmont Avenue
Berkeley, CA ca 94720
United States
5105759980 (Phone)

HOME PAGE: http://faculty.haas.berkeley.edu/bgreen/

Victoria Magdalena Vanasco

Stanford University ( email )

Stanford, CA 94305
United States

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