Competition, Securitization, and Efficiency in US Banks

Using a sample of US banks between 2001 and 2013, this paper investigates the impact of competition on bank efficiency, the bank-specific factors that increase the likelihood of securitization, the previously untested impact of securitization on efficiency, and the effect of the interaction between competition and securitization on efficiency. We confirm that higher competition reduces efficiency. More importantly, our empirical findings suggest that banks securitizing their loans are more cost efficient than other banks. We thus propose cost efficiency as a new mechanism that explains how securitization reduces bank screening and monitoring incentives. Surprisingly, deeper investigations show that the positive effect of securitization on efficiency is more pronounced in competitive banking markets. Overall, this paper implements important policy recommendations that help promote financial stability