Securitization by Banks and Finance Companies: Efficient Financial Contracting or Regulatory Arbitrage?

Bernadette Minton, Anthony Sanders and Philip E. Strahan
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Bernadette Minton: Ohio State U
Anthony Sanders: ?
Philip E. Strahan: Boston College and Wharton Financial Institutions Center

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: In this paper, we test two competing explanations for the increasing use of securitization by financial institutions. First, by reducing financial distress costs, securitization lowers the cost of debt finance, particularly for risky and highly levered companies. Second, regulatory distortions in the Basle Capital Accord may create incentives for highly levered banks to securitize assets in order to avoid binding or nearly binding capital requirements. We find that unregulated finance companies and investment banks are much more apt to securitize assets than banks, and that risky and highly levered financial institutions are more likely to engage in securitization than safer ones. At the same time, highly levered banks – banks with low capital ratios – are less likely than better capitalized banks to securitize. Thus, the evidence suggests that securitization is best understood as a contracting innovation aimed at lowering financial distress costs rather than an outgrowth of poorly structured regulations.

Date: 2004-10
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Citations: View citations in EconPapers (38)

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