The crisis of 2007-2009 caused an effective breakdown of securitisation markets, reversing years of rapid growth. Starting already in the early 1960s, securitisation of mortgage loans became first common in the US. It steadily became widespread until the Global Crisis, when it peaked at around 50% of outstanding mortgage and consumer loans in the US, and became a worldwide phenomenon led by advanced economies but also with significant growth in emerging markets.
The policy debate
Spurred by the experience during the Crisis, a broad discussion has emerged in recent years about the future of securitisation. Several policymakers have spoken out against, but also in favour of securitisation markets. Most arguments that have been put forward in the debate refer to securitisation in general (such as ensuring that securitisations are transparent and are not distorting incentives of the involved parties) and do not differentiate among the different types. In Europe, the ECB and the Bank of England have stated their intention to revive securitisation markets, focusing on the high quality segment of the ABS market (See ECB and Bank of England 2014).
There are clear benefits to securitisation …
Securitisation allows banks to shift risk off their balance sheet and frees up capital for new lending. Securitisation is also an important risk management tool, allowing banks to achieve a more diversified pool of exposures. This should lower their cost of taking on risks, the benefit of which should, at least partially, be passed on to borrowers in the form of more favourable lending conditions and higher credit availability. Securitisation also allows banks to better insulate themselves from funding shocks, potentially stabilising credit extension.
… but also costs
On the downside, securitisation has demonstrated the potential to worsen the efficiency of financial intermediation. The main reason is the presence of informational problems. In particular, the securitising banks become less exposed to borrower risk, which undermines their incentives to screen and monitor. This may result in lower quality lending, and erodes the benefits of intermediation relative to market-financing. High complexity has also been identified as a potential cost to securitisation, as it reduces the ease with which outsiders can evaluate securitisation products, potentially resulting in inefficient investment decisions.
The macroeconomic effects of securitisation: New evidence
The literature has typically focused on the impact of securitisation on banks themselves (such as their lending behaviour or their risk-taking), the impact on loan conditions (e.g., the pricing of loans) and the impact on borrowers (such as their likelihood of default).1 This focus on the micro-level has clear advantages in providing good settings for identification.
In a recent study (Bertay et al. 2015) we consider the relationship between securitisation and aggregate outcomes, in particular economic activity. While identification is more challenging at the aggregate level, this focus offers distinct advantages. Securitisation is likely to be associated with important externalities that cannot be captured by micro-studies. For example, while securitisation may very well increase profits and lower risk for the bank that is shedding the risk, it may be detrimental to the buyers of securitisation products. In addition, securitisation may also affect the efficiency of capital allocation in the economy (it can either increase or decrease it), which has implications that will not be visible at the immediate bank-firm nexus.2
Securitisation and economic activity
Specifically, we exploit country-level variations in securitisation activities to analyse the relationship between securitisation and economic aggregates.
- Based on a large international sample of securitisation issuances from 1995 to 2012, we find securitisation activities to be negatively related to GDP per capita growth, capital formation, and changes in new firm establishments.
The effect is economically significant and is not driven by the period of the Global Crisis, suggesting that it is a structural property of securitisation.
Figure 1 summarises the relationship, plotting a country’s growth rate during 1995-2012 against its securitisation intensity, measured by the yearly issuance of new securitisation products scaled by GDP.
Figure 1. Securitisation and growth of OECD countries (1995-2012)
The credit composition channel
What can explain this finding? We put forward a new channel based on the idea that securitisation affects the aggregate composition of credit in the economy. Securitisation of residential mortgage and consumer loans (which are more homogenous and less information sensitive) is easier than for business loans. The development of securitisation is thus expected to change bank behaviour broadly favouring loans to households, as opposed to loans to business. As both types of borrowers are competing for an economy’s scarce resources, this may result in an aggregate reduction in investment and lower economic activity.3
Our empirical analysis shows that securitisation of loans to households is negatively related to economic activity. Securitisation of business loans, on the other hand, displays a positive association with economic activity, albeit a weak one.
In addition, we find that:
- Securitisation increases an economy’s consumption-investment ratio.
- Securitisation has a more pronounced (negative) impact on proxies of the supply side of the economy than on economic growth. This is consistent with a shift from investment to consumption constraining the supply side of the economy, while potentially boosting demand (and hence leading to a more muted impact on GDP).
The results indicate that securitisation may not only have effects for the parties immediately involved in the securitisation process, but also for the wider economy. Most importantly, the results suggest that the impact of securitisation depends on the underlying type of collateral. While securitisation of business loans may encourage investment and spur economic activity, securitisation of consumer loans may at the aggregate divert resources away from productive purposes.
The ongoing debate on whether to revive securitisation should put a focus on which part of the securitisation market to stimulate. Policymakers clearly recognise the importance of fostering ‘high quality’ securitisation, that is, securitisations that are transparent and include collateral of low risk borrowers. Our analysis suggests that the authorities should not only care about the securitisation quality, but also whether the collateral is in the form of household or business loans. If the objective is to stimulate growth and investment, the focus should be on the latter.
Disclaimer: The views expressed in this article are those of the authors and should not be attributed to the World Bank, its Executive Directors, or the countries they represent. Any errors are the responsibility of the authors.
Bank of England and ECB (2014), “The case for a better functioning securitization market in the European Union”, Discussion Paper.
Beck, T, B Buyukbacak, F K Rioja and N T Valev (2012), “Who gets the credit? And does it matter? Household vs. firm lending across countries”, BE Journal of Macroeconomics 12.1:2.
Bertay, A, D Gong, and W Wagner (2015), “Securitization and Economic Activity: The Credit Composition Channel”, CEPR Discussion Paper 10664.
Keys, B J, T Mukherjee, A Seru, and V Vig (2010), “Did securitization lead to lax screening? Evidence from subprime loans”, The Quarterly Journal of Economics, 125(1), 307-362.
Nadauld, T D and M S Weisbach (2012), “Did securitization affect the cost of corporate debt?” Journal of Financial Economics, 105(2), 332-352.
Norden, L, C S Buston, and W Wagner (2014), “Financial innovation and bank behavior: Evidence from credit markets”, Journal of Economic Dynamics and Control, 43, 130-145.
Sassi, S and A Gasmi (2014), “The effect of enterprise and household credit on economic growth: New evidence from European Union countries”, Journal of Macroeconomics, 39, 226–231.
1 See, for example, Nadauld and Weisbach (2012), Norden et al. (2014) or Keys et al. (2010).
2 While we focus on a specific type of financial innovation, the literature on financial development (starting from King and Levine 1993 and surveyed in Levine 2005) studies financial development more broadly. It emphasises that financial development can have a positive impact on economic growth by reducing financing constraints and by affecting the efficiency of intermediation and the allocation of capital in the economy.
3 Consistent with the different implication for economic activity, Beck et al. (2012) show that for a sample of developed and developing economies enterprise credit facilitates economic growth whereas household credit has no impact on growth. Sassi and Gasmi (2014), studying 27 European countries, find that enterprise credit is positively related to economic growth whereas household credit has a negative effect.