Introduction

Abstract

Securitization has significantly changed banks’ role as financial intermediaries from traditional bank lending to transactional banking. Through securitization, banks turn illiquid loans into marketable securities, off-load part of their credit exposure to outside investors and raise new funds to increase lending further. This transformation has implications on bank performance and lending behaviour. Prior to the 2007–2009 financial crisis, securitization was acclaimed as an innovative mechanism for economy-wide efficient risk distribution, increasing the credit supply and enhancing the resilience and stability of the financial system. In contrast, the sceptical view was that securitization reduces banks screening and monitoring incentives, leads to retention of riskier loans, enhances risk appetite, leads to lax lending standards and, overall, destabilizes the financial system.