Disentangling the Impact of Securitization on Bank Profitability

Abstract

We empirically evaluate the channels through which securitization impacts bank profitability. To this end, we analyze the role played by bank risk, cost of funding, liquidity and regulatory capital in explaining the relationship between securitization and bank profitability. We find that securitization activities tend to boost profitability. We also show that bank risk, cost of funding, liquidity and regulatory capital individually and jointly act as transmission channels in the securitization-profitability relationship. In addition, we break down the securitization effects on bank profitability into direct and indirect effects and identify the contribution of each individual transmission channel in the overall impact on bank profitability. Our findings have several implications for banks, financial markets, and regulators.

Keywords: Securitization; Bank profitability; Bank risk; Regulatory capital; Liquidity; Cost of funding

JEL Classification: G21; C31