Loan securitization, bank risk, and efficiency

The 2007-09 financial crisis highlighted the devastating impact of securitization on the stability of the banking system. However, studies on securitization are far from sufficient to show the impact on a bank’s performance. To better understand the impact of securitization in order to prevent such crisis to happen again, I study bank loan securitization in this Ph.D. thesis. This thesis aims to provide empirical explanations to answer two dilemmas in securitization literature. First, ambiguous results are presented in the impact of securitization on bank risk. Classic theories suggest that loan securitization allows securitizers to transfer the potential risk to outside investors and diversify the large exposure to a single shock by sharing this potential riskiness with all investors linked by securitized assets, which in turn decreases bank risk and increases the stability of financial system. However, recent evidence reveals that securitizers have the intention to ignore potential risk and take on more risk, introducing more risk into the financial system and increasing the level of bank riskiness. Second, securitization introduces a higher flexibility for banks to allocate their resources and increases bank efficiency accordingly. However, securitization process is closely linked to a large amount of upfront and managerial costs, which can lead to an additional burden to banks and decrease securitizers’ efficiency. This thesis develops a synthetic empirical analysis and shows a short- and long-term impact of securitization on bank risk, and a positive impact on a bank’s efficiency score. Details information are as follows. In the first chapter, I provide an introduction of the thesis. In chapter two, I present a comprehensive introduction on securitization, including both background history, literature, and related empirical issues. I also provide detailed information on securitization transaction in practice. In the empirical method review, this thesis highligh