Securitization, Competition and Efficiency

Abstract

This article analyzes the motivation for loan securitization and its effect on loan market efficiency. We consider a two-period loan market competition model in which period 2-competition is affected by the winner's curse. This increases ex ante competition for a greater initial market share. Given that securitization transfers a part of the return from loans to other investors, banks can use it as a tool to signal that they will reduce monitoring, for the purpose of softening ex ante competition. Thus, securitization adversely affects loan market efficiency while it leads banks to increases collectively their profits. This effect is driven by primary loan market competition, not by the exploitation of informational asymmetries in the secondary market for loans.

Keywords: securitization, loan sales, banking competition, informational asymmetries

JEL Classification: G21, L12, L13