Securitization, Ratings, and Credit Supply

Brett Green Brendan Daley, Victoria Vanasco - Nov 22, 2017

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.
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ratings securitization lending standards