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The Role of Securitization in Bank Liquidity and Funding Management

52 Pages Posted: 6 Mar 2005 Last revised: 25 May 2012

Elena Loutskina

University of Virginia - Darden School of Business

Date Written: August 16, 2010

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

Suggested Citation

Loutskina, Elena, The Role of Securitization in Bank Liquidity and Funding Management (August 16, 2010). Journal of Financial Economics (JFE), Forthcoming; EFA 2005 Moscow Meetings, Forthcoming. Available at SSRN: https://ssrn.com/abstract=677001

Elena Loutskina (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-4031 (Phone)

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