Securitization, Competition and Monitoring

Jung-Hyun Ahn and Régis Breton ()

Working papers from Banque de France

Abstract: We analyze the impact of loan securitization on competition in the loan market. Using a dynamic loan market competition model where borrowers face both exogenous and endogenous costs to switch between banks, we uncover a competition softening effect of securitization that allows banks to extract rents in the primary loan market. By reducing monitoring incentives, securitization mitigates winner s curse effects in future stages of competition thereby decreasing ex ante competition for initial market share. Due to this competition softening effect, securitization can adversely affect loan market efficiency while leading to higher equilibrium profits for banks. This effect is driven by primary loan market competition, not by the exploitation of informational asymmetries in the secondary market for loans. We also argue that banks can use securitization as a strategic response to an increase in competition, as a tool to signal a reduction in monitoring intensity for the sole purpose of softening ex ante competition. Our result suggests that securitization reforms focusing exclusively on informational asymmetries in markets for securitized products may overlook competitive conditions in the primary market.

Keywords: securitization; loan sales; banking competition; monitoring; rent extraction. (search for similar items in EconPapers)
JEL-codes: G21 L12 L13 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-com
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://publications.banque-france.fr/sites/defaul ... g-paper_457_2013.pdf (application/pdf)

Related works:
Journal Article: Securitization, competition and monitoring (2014)
Working Paper: Securitization, competition and monitoring (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:457

Access Statistics for this paper

More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().