The securitization expansion preceding the 2007-2009 financial crisis introduced alternative liquidity sources and increased bank lending capacity. During the securitization expansion there was a rise and subsequent collapse of the subprime mortgage market. We investigate the impact of securitization and the subprime mortgage collapse on bank lending during the crisis. The results suggest that securitization, for the large and money-center bank, is a cost effective liquidity source since traditional bank funding costs play a diminished role in the supply of bank lending. We find that for the small and medium bank samples increases in REPO rates fostered lending during the crisis period. We show that real estate lending exposure negatively affects bank lending in the sample of small and medium banks suggesting a liquidity building behavior for these banks.

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Banking and Finance Review
Sprott School of Business

Egly, P. (Peter), Jackson, D, & Johnk, D. (David). (2015). The impact of securitization and bank liquidity shocks on bank lending: Evidence from the U.S. Banking and Finance Review, 7(2), 55–86.