Deregulation and the Securitization Boom

Abstract

We provide novel evidence that bank branching deregulation increased securitization in the lead up to the financial crisis. The exogenous state-specific removal of interstate branching restrictions increases the probability that 1) a bank operates an "originate to distribute" model by 7%, and 2) a loan is securitized by 5.6%. These effects are more pronounced among large banks. We find that the increase in securitization stems from deregulation increasing the cost of deposits as the equilibrium number of bank branches rises across markets. The findings highlight a hitherto neglected factor behind the rapid expansion in securitization before the financial crisis.

Keywords: OTD, securitization, branching deregulation, deposit competition

JEL Classification: G21, G28, K11