Does Regulatory Capital Arbitrage or Asymmetric Information Drive Securitization?

30 Pages Posted: 22 Jun 2004  

Brent W. Ambrose

Pennsylvania State University

Michael LaCour-Little

California State University at Fullerton

Anthony B. Sanders

George Mason University - School of Business

Date Written: May 26, 2004

Abstract

Banks face the choice of keeping loans on their balance sheet as private debt or transforming them into public debt via asset securitization. Securitization transfers credit and interest rate risk, increases liquidity, augments fee income, and improves capital ratios. Yet many lenders still choose to retain a portion of their loans in portfolio. An open research question is whether lenders exploit asymmetric information to sell riskier loans into the public markets or retain riskier loans in response to regulatory capital incentives (regulatory capital arbitrage). We examine this question empirically using micro-level data and find that securitized mortgage loans have experienced lower ex-post defaults than those retained in portfolio, providing evidence consistent with the latter explanation for securitization.

Keywords: Banks, debt, securitization, regulatory capital

Suggested Citation

Ambrose, Brent W. and LaCour-Little, Michael and Sanders, Anthony B., Does Regulatory Capital Arbitrage or Asymmetric Information Drive Securitization? (May 26, 2004). Available at SSRN: https://ssrn.com/abstract=557223 or http://dx.doi.org/10.2139/ssrn.557223

Brent W. Ambrose (Contact Author)

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Michael LaCour-Little

California State University at Fullerton ( email )

5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
657-278-4014 (Phone)
657-278-2161 (Fax)

Anthony Bown Sanders

George Mason University - School of Business ( email )

Fairfax, VA 22030
United States

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