Asymmetric information and the secu ritization of SME loans (with Margherita Bottero)
Abstract:
Based on granular data for the entire po
pulation of firms borrowing from Italian banks active in the securitization
industry, we test for asymmetric information in this market. We borrow the
methodology from the empirical literature on insurance, looking at the cor
relation between the degree of risk-transfer and the default (accident) pro
bability. The methodology adopted also provides information on how loans ar
e selected for securitization based on observable characteristics. In addit
ion, the presence of multiple lending relationships is exploited to disenta
ngle the adverse selection and the moral hazard components. We document the
presence of asymmetric information, mainly in the form of adverse selectio
n. Moral hazard is limited to credit exposures characterized by weak relati
onship ties between the borrower and the lender, indicating that a tight cr
edit relation is a credible commitment to continue monitoring after securit
ization. Importantly, the selection of securitized loans based on observabl
es is such that it largely compensates the effects of asymmetric informatio
n, rendering the unconditional quality of securitized loans significantly b
etter than that of non-securitized ones. Thus, despite the presence of asym
metric information, our results are inconsistent with the view that credit-
risk transfer lead to lax credit standards.