A heavy reliance on the loan securitization model not only led to a crisis in the housing market, but similarly led to riskier corporate lending, according to researcher João Santos with the Federal Reserve Bank of New York.
Santos released a report Monday, saying historically banks kept loans on their books after origination, but this model was replaced with a preference for selling off loans on the secondary loan market. Corporate lending wasn’t immune to this trend, Santos claims.
“The securitization of corporate loans grew spectacularly in the years leading up to the financial crisis. Prior to 2003, the annual volume of new collateralized loan obligations (CLOs) issued in the United States rarely surpassed $20 billion. Since then, this activity grew rapidly, eclipsing $180 billion in 2007,” Santos wrote.
Santos says corporate loan securitization gave banks a chance to get these loans off their balance sheets. But Santos concluded, “As with the securitization of other securities, the securitization of corporate loans, however, may lead to looser underwriting standards.”
Click here to read the full report.