Securitization, Ratings, and Credit Supply

64 Pages Posted: 20 Mar 2017 Last revised: 11 Jul 2019

See all articles by Brendan Daley

Brendan Daley

Johns Hopkins University

Brett S. Green

University of California, Berkeley - Haas School of Business; Washington University in St. Louis - John M. Olin Business School

Victoria Vanasco

CREi and UPF; Barcelona GSE

Date Written: June 28, 2019

Abstract

We develop a framework to explore the effect of credit ratings on loan origination and securitization. In the model, banks privately screen and originate loans and then issue securities that are backed by loan cash flows. Issued securities are rated and sold to investors.

Without ratings, banks with good loans retain a portion of them to signal quality to investors. With informative ratings, banks rely less on costly retention and more on public information. Moreover, when ratings are sufficiently accurate, banks may eschew retention altogether and simply originate to distribute (OTD). Thus, ratings endogenously shift the economy from a Signaling equilibrium with inefficient retention towards an OTD equilibrium with inefficiently low lending standards. Ratings therefore increase overall efficiency provided the reduction in costly retention more than compensates for the origination of some negative NPV loans. We study how banks ability to screen loans affects these predictions, and use the model to analyze commonly proposed policies such as mandatory “skin in the game.”

Keywords: Loan Origination, Securitization, Credit Supply, Ratings

JEL Classification: G01, G21, G28

Suggested Citation

Daley, Brendan and Green, Brett S. and Vanasco, Victoria, Securitization, Ratings, and Credit Supply (June 28, 2019). Journal of Finance, Forthcoming; Stanford University Graduate School of Business Research Paper No. 17-26. Available at SSRN: https://ssrn.com/abstract=2937297 or http://dx.doi.org/10.2139/ssrn.2937297

Brendan Daley

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
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/

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Victoria Vanasco

CREi and UPF ( email )

Barcelona GSE ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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