Banks are usually better informed on the loans they originate than other financial intermediaries. As a result, securitized loans might be of lower credit quality than otherwise similar nonsecuritized loans. We assess the effect of securitization activity on loans’ relative credit quality by employing a uniquely detailed dataset from the euro-denominated syndicated loan market. We find that, at issuance, banks do not seem to select and securitize loans of lower credit quality. Following securitization, however, the credit quality of borrowers whose loans are securitized deteriorates by more than those in the control group. We find tentative evidence suggesting that poorer performance by securitized loans might be linked to banks’ reduced monitoring incentives.

Banks generate proprietary information and tend to have superior knowledge on the credit quality of the loans they originate. As a result, banks might have an incentive to securitize loans of lower credit quality to unsuspecting investors (Gorton and Pennacchi, 1995). Largely for this reason, securitization has been perceived as a major contributing factor to the 2007-2009 financial crisis (Financial Crisis Inquiry Commission, 2011). Following the crisis, authorities have investigated a number of banks over claims related to securitized loans.1 In this direction, recent empirical evidence suggests that banks tend to securitize the riskier mortgages of their portfolio (see for instance Krainer and Laderman, 2014; Elul, 2015). Yet, evidence on the impact of securitization on corporate loans on credit quality remains very limited, it is circumscribed to the U.S. and seems to offer contradictory results (Benmelech et al., 2012; Bord and Santos, 2015).