Securitised loans are riskier than retained ones February 6, 2013 at 10:10 am

João Santos reports some interesting research on the NY FED’s blog:

We show that during the boom years of securitization, corporate loans that banks securitized at loan origination underperformed similar, unsecuritized loans originated by the same banks. Additionally, we report evidence suggesting that the performance gap reflects looser underwriting standards applied by banks to loans they securitize.

This is utterly unsurprising. What would be interesting to know is whether the current retention requirements fix this problem. My guess is that they don’t, as they are not big enough, but it is just a guess.

4 Responses to “Securitised loans are riskier than retained ones”

  1. At last week’s annual Las Vegas American Securitization Forum event, the NY Fed’s Adam Ashcroft said that a soon-to-be-published NY Fed WP would report similar evidence in favor of retention in the CMBS market. But I agree with you that retention requirements, as currently set out, are likely to be very useful. An effective retention requirement regime has to be more dynamic and granular.

  2. Oops! That’s Adam Ashcraft!

  3. Thanks KM – interesting

  4. But the securitization revolution that really stifled traditional banking was led by Fannie Mae (FNMA) and Freddie Mac. The government-sponsored agencies paid banks a fee for originating mortgages that conformed to certain criteria, sparing banks the expense of in-depth analysis and losses from bad loans. Fannie and Freddie sold securitized bundles of the mortgages by suggesting they were as safe as Treasury bonds. Regulators then encouraged banks to buy the securities. Capital requirements for the residential mortgages that a bank kept on its books were more than twice those for mortgage-backed securities that had AA or AAA ratings. So banks were feeding the securitization machine with loans on one side and scooping up what it produced on the other.