Securitization, Ratings, and Credit Supply

Journal of Finance, 2020

Working Paper No. 00023-00

ratings securitization lending standards

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We show that the availability of credit ratings (or other public information) increases the allocative efficiency of cash flows by reducing costly retention, but reduces lending standards and can lead to an oversupply of credit. These findings are in contrast to regulators' view of credit ratings as a "disciplining device." Moreover, improved screening does not solve the problem; as banks' screening technology becomes more precise, their lending standards collapse and some (though not all) bad loans are deliberately originated.

Brendan Daley

Brendan Daley

Johns Hopkins University

Brett Green

Brett Green

Washington University in St.Louis

Victoria Vanasco

Victoria Vanasco

CREI and UPF