Thesis_gd_final_vers.. - Vernimmen

eceivables with $3.5 billion, other consumer loans with $0.17 billion, home equity lines of credit
(HELOCs) with $0.11 billion. They also found that very few banks were securitizing most or all
asset classes. On the contrary most of them were securitizing only one or a few asset classes.
Unlike other innovations developed by commercial banks, securitization has been supported by
government intervention through two government sponsored enterprises: Fannie Mae and Freddie
Mac. Backed by an implicit government guarantee, these two institutions have played a key role in
the residential mortgage market and the growth in mortgage-backed securities (MBS). According
to DeYoung et al., citing Passmore et al., Fannie Mae and Freddie Mac have sold to investors
$1,200 billion of MBS and are holding on their balance sheet another $1,000 billion.
Uzun and Webb tried to determine the characteristics of banks engaged in securitization and the
drivers of securitization by designing a logit model taking into account a sample of 112 banks
engaged in securitization and 112 banks not engaged in securitization. The sample of nonsecuritizing
bank has been designed to match each securitizing bank with the non-securitizing
bank which has the closest asset size. They found that securitizing banks are larger than nonsecuritizing
banks (five times larger on average based on their matched sample). However they
found no significant difference in total risk-based capital ratio or in tier 1 leverage ratio. In one of
their model, they also found that growth in total assets is a significant factor.
Asset size matters most because, like many other financial innovations, securitization benefit from
strong scale economies, especially in the set up of conduits and asset pools where costs are rather
fixed and not influenced by size (specific IT infrastructure, specialized teams, costs associated with
legal and regulatory matters…). Even though community banks have not been able to develop
their own securitization business they have used it as an important tool to geographically diversify
their locally-concentrated loan portfolios, by purchasing MBS and financing it with loan sales to
investment banks or SPV set up by larger banks engaged in securitization or by decreasing their
exposure to traditional securities such as government bonds.
ii) The impact of securitization on the banking system and banks’ business model
Securitization has had a profound impact on the banking system and is doubtlessly at the origin of
the so-called “subprime crisis”, referring to the mortgages contracted by high-risk borrowers with
low income, bad credit history, high loan-to-value and payment-to-income ratios.
The most visible consequence of securitization has been a boom in credit, especially household
credit. This has materialized by the rise in residential real estate mortgages. According to Heilpern
et al. (2009), the stock of outstanding residential real estate mortgages reached $11 trillion at the
end of 2007, of which an estimated $2 trillion were subprime and another $1.1 trillion were f home
equity lines of credit (HELOCs). A HELOC is usually some sort of revolving or fixed credit in
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