Journal of Finance Vol. 75 No. 2 2020

Securitization, Ratings, and Credit Supply

Brendan Daley^{1,2,3,4,5,6,7,8,9,10}; Brett Green^{1,2,3,4,5,6,7,8,9,10}; Victoria Vanasco^11,3,12,8

¹ University of North Carolina at Chapel Hill · ² University of Minnesota · ³ Johns Hopkins University · ⁴ University of Colorado Boulder · ⁵ Princeton University · ⁶ Washington University in St. Louis · ⁷ Centre de Recerca en Economia Internacional · ⁸ Banco de Portugal · ⁹ New York University · ¹⁰ The University of Texas at Austin · ¹¹ Conference Board · ¹² Green Chemistry

Abstract

We develop a framework to explore the effect of credit ratings on loan origination. We show that ratings endogenously shift the economy from a signaling equilibrium, in which banks inefficiently retain loans to signal quality, toward an originate‐to‐distribute equilibrium with zero retention and inefficiently low lending standards. Ratings increase overall efficiency, provided that the reduction in costly retention more than compensates for the origination of some negative net present value loans. We study how banks' ability to screen loans affects these predictions and use the model to analyze commonly proposed policies such as mandatory “skin in the game.”

DOI

10.1111/jofi.12866

Volume

75

Issue

2

Pages

1037-1082

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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