By Serena Lynn, Editor, the Federal Banking Law Reporter and Bank Digest.
According to a report by the Federal Reserve Bank of New York, there is growing evidence that securitization adversely affected the screening incentives of mortgage lenders, contributing to a large increase in delinquencies in the U.S. subprime housing market during the financial crisis. New York FRBank Vice President João Santos has posted an article discussing whether the growth of securitization also affected corporate lending. According to Santos, “the securitization of corporate loans grew spectacularly in the years leading up to the financial crisis.” Prior to 2003, Santos says the annual volume of new collateralized loan obligations issued in the United States rarely surpassed $20 billion, but eclipsed $180 billion in 2007. “By securitizing loans, banks could lower the risk on their balance sheets and free up capital for other business while continuing to earn origination fees,” Santos asserts, adding that “if banks anticipate that they won’t retain in their balance sheets the loans they originate, their incentives to screen loan applicants at origination will be reduced” and, once securitized, a bank’s “incentives to monitor the borrower during the life of the loan will also be reduced.”