Securitization and lending competition

Abstract

We study the effects of securitization on interbank lending competition. An applicant's observable features are seen by a remote bank, while her true credit quality is known only to a local bank. Without securitization, the remote bank does not compete because of a winner's curse. With securitization, in contrast, ignorance is bliss: the less a bank knows about its loans, the less of a lemons problem it faces in selling them. This enables the remote bank to compete successfully in the lending market. Consistent with the empirical evidence, remote and securitized loans default more than observationally equivalent local and unsecuritized loans, respectively.