Securitization Without Adverse Selection: The Case of Clos
By Efraim Benmelech, Jennifer Dlugosz, Victoria Ivashina. 2012
209 citations recorded by the source corpus.
In this paper, we investigate whether securitization was associated with risky lending in the corporate loan market by examining the performance of individual loans held by collateralized loan obligations. We employ two different data sets that identify loan holdings for a large set of CLOs and find that adverse selection problems in corporate loan securitizations are less severe than commonly believed. Using a battery of performance tests, we find that loans securitized before 2005 performed no worse than comparable unsecuritized loans originated by the same bank. Even loans originated by the bank that acts as the CLO underwriter do not show under-performance relative to the rest of the CLO portfolio. While some evidence exists of under-performance for securitized loans originated between 2005 and 2007, it is not consistent across samples, performance measures, and horizons. Overall, we argue that the securitization of corporate loans is fundamentally different from securitization of other assets classes because securitized loans are fractions of syndicated loans. Therefore, mechanisms used to align incentives in a lending syndicate are likely to reduce adverse selection in the choice of CLO collateral.
Subfields: Accounting, Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/988d7b8d767a547dba9f611a1d1bbf7ef75161f8
Citations in the corpus
- Risky Lending: Does Bank Corporate Governance Matter? (2017, unknown): “Furthermore, Benmelech, Dlugosz, and Ivashina (2012) find that, conditional on borrowers’ credit quality, securitized loans do not perform worse than unsecuritized loans.”
- Institutional demand pressure and the cost of corporate loans (2011, unknown): “However, Benmelech, Dlugosz, and Ivashina (2009), find there is no difference in performance of loans with and without CDO investors.”
- Securitization is Not that Evil after All (2011, unknown): “Benmelech et al. (2011) depart from the previous papers by analyzing collateralized loan obligations (CLO), a form of securitization in which the underlying loans are to middle sized and large business loans (typically a fraction of syndicated loans).”
- The Rise of Shadow Banking: Evidence from Capital Regulation (2018, unknown): “(41)These performance results square with Benmelech et al. (2012) who find that, controlling for credit rating, nonbank identity does not predict ex-post differences in syndicated loan performance, in terms of borrower ROA, credit downgrades, CDS spreads during the recent recession.”
- Financial Crises and the Composition of Cross-Border Lending (2014, unknown): “Benmelech, Dlugosz, and Ivashina (2012) examine loan holdings for collateralized loan obligations and show that, for each originating bank, securitized syndicated loans do not underperform unsecuritized ones.”