Does regulatory capital arbitrage, reputation, or asymmetric information drive securitization?

Brent William Ambrose, Michael Lacour-Little, Anthony B. Sanders

Research output: Contribution to journalArticle

75 Scopus citations

Abstract

Banks can choose to keep loans on balance sheet as private debt or transform 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 retain a portion of their loans in portfolio. Do lenders exploit asymmetric information to sell riskier loans into the public markets or retain riskier loans in portfolio? If riskier loans are indeed retained in portfolio, is this motivated by regulatory capital incentives (regulatory capital arbitrage), or a concern for reputation? We examine these questions empirically and find that securitized mortgage loans have experienced lower ex-post defaults than those retained in portfolio, providing evidence consistent with either the capital arbitrage or reputation explanation for securitization.

Original languageEnglish (US)
Pages (from-to)113-133
Number of pages21
JournalJournal of Financial Services Research
Volume28
Issue number1-3
DOIs
StatePublished - Oct 1 2005

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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