The Role of Securitization in Bank Liquidity and Funding Management

Abstract

This paper studies the role of securitization in bank management. I propose a new index of “bank loan portfolio liquidity,” which can be thought of as a weighted average of the potential to securitize loans of a given type, where the weights reflect the composition of a bank loan portfolio. I use this new index to show that by allowing banks to convert illiquid loans into liquid funds, securitization reduces banks’ holdings of liquid securities and increases their lending ability. Furthermore, securitization provides banks with an additional source of funding and makes bank lending less sensitive to cost of funds shocks. By extension, the securitization weakens the ability of the monetary authority to affect banks’ lending activity, but makes banks more susceptible to liquidity and funding crisis when the securitization market is shut down.

Keywords: securitization, bank lending, monetary policy, bank lending channel

JEL Classification: G21, G32, E52