Thesis_gd_final_vers.. - Vernimmen

Beyond a credit boom which benefitted mostly to households and the real estate market,
securitization has triggered a shift from the traditional intermediated banking model in which
banks originate and retain loans on their balance sheet, financing them mostly with equity capital
and deposits, to a disintermediated and fragmented banking model deeply interconnected with
financial markets, in which banks originate or purchase and then sell on and distribute loans,
keeping few of them on balance sheet. Consequently, the high loan portfolio turnover permitted
by securitization allows banks to lend more with the same amount of equity capital because most
loans don’t stay on the balance sheet. Banks tend to become an intermediary between borrowers
and capital markets, generating fees and income through origination, sale and ABS structuring and
underwriting. However, the reality is maybe more complex: studies such as Acharya, Suarez and
Schnabl (2010) on conduits have shown that securitization does not always result in a “true sale”
in so far as the risk associated with the assets are not passed away to outside investors but stay
within the bank. Even though US GAAP does not impose on banks to consolidate conduits
(whereas IFRS does), we can consider that the frontier between on and off-balance sheet may be
in some instances more fictive than real. In a way, securitization can be seen as a non-traditional
source of financing bank’s assets by borrowing money on financial markets; this tends to mitigate
the disintermediation view.
Another subject of interest is the advantages and disadvantages of securitization. At the light of
the recent crisis, the supposed risk-diversification, increased transparency and stability of the
banking system do not sound convincing. However, when looking carefully at the traditional
banking model, we find that banks use deposits, which are by nature short-term resources which
can be withdrawn at any time and exhibited a strong volatility in the 1970s and 1980s, to finance
loans which are long-term commitments, hence creating an asset liability mismatch as well as a
lack of visibility on resources that could be invested. When considering that households have been
investing a decreasing part of their financial assets on checkable accounts and savings accounts
from the 1970s until now (DeYoung et al. (2004)), securitization may have appeared to be a cheap,
more reliable and longer-term source of funding than deposits. It also allowed banks to indirectly
hold more assets without having to increase their regulatory capital.
Because it establishes a fragmented value chain with numerous intermediaries between the
borrower and the final investor, securitization creates non-trivial agency problems and leaves room
for arbitrage opportunities. Concerning agency problems, there is obviously an issue of
asymmetric information between the loan originator and the final investor. Credit card
securitization provides an insightful example of that. Outside investors can access to all the
information on the credit history of the credit card holders pooled in the SPV through various
public and private databases. The only piece of information they do not have, but which the
- 20 -