Competition, securitization, and efficiency in US banks

Abstract

This paper investigates the different effects of competition and securitization on US bank efficiency between 2001 and 2019. Using Propensity Score Matching (PSM) and a two-step dynamic Generalized Method of Moments (GMM) estimation, we find that higher securitization increases banks’ cost efficiency scores. When banks are under competitive pressure, the fixed-effects and GMM models show that securitization is positively associated with the cost efficiency of banks, while it mitigates their screening and monitoring incentives. Robust to a battery of alternative tests, our findings introduce bank efficiency as a new mechanism explaining how banks that securitize loans insignificantly invest in screening and monitoring their potentially risky borrowers. In order to promote sustainable loan quality, this paper underlines the importance of improved regulation in highly competitive markets where loan securitization is more common.

Keywords: Securitization; Competition; Bank efficiency; Screening and monitoring; Bank regulation

JEL Classification: G21, G32, K29