Document Type

Working Paper

Publication Date

11-28-2011

Working Paper Number

WP #11025, November 2011

Abstract

We study the effects of securitization on interbank lending competition when banks see private signals of local applicants' repayment chances. If banks cannot securitize, the outcome is efficient: they lend to their most creditworthy local applicants. With securitization, banks lend also to remote applicants with strong observables in order to lessen the lemons problem they face in selling their securities. This reliance on observables is inefficient, raises the mean default risk, and may lead to a deceptive rise in credit scores.

JEL Classification

D82, G14, G21

File Format

application/pdf

Length

61 pages

Included in

Economics Commons

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