Competition, financial innovation and commercial bank loan portfolios 汇报人：李英英 学号：16720798

Contents 01 02 03 04 Abstract&Keywords Empirical framework and data Estimation results 04 Conclusion

01 Abstract&Keywords

Abstract&Keywords Abstract: I examine how US commercial bank loan portfolios change in response to the rise of securitization markets and banking market deregulations over 1976–2003. Banks increasingly tilt their portfolios toward real-estate-backed loans. However, there are significant differences across banks. Larger banks and younger banks disproportionately shift their lending toward real-estate-backed loans, particularly commercial real-estate-backed loans, whereas smaller banks and older banks maintain greater shares of their loan portfolios in commercial and personal loans. When larger banks make more real-estate-backed loans, they charge lower interest rates, consistent with these banks lowering the costs of lending and expanding credit for borrowers. In contrast, smaller banks charge higher interest rates, consistent with these banks restricting lending to a select group of borrowers. Keywords: Financial Innovation; Commercial Bank; loan Portfolios

Empirical framework and data 02 Empirical framework and data

2.1 Empirical framework and data The aim of the analysis is to estimate how bank loan portfolios change in response to trends in securitization and deregulation over the time period 1976–2003. I first examine the relation between bank loan portfolios and trends in securitization over the entire sample period by bank size and age. As such, the first regressions take the form of the following equation: In addition to examining the response of bank loan portfolios to securitization trends over the sample period, I also examine how loan pricing responds to these same trends. The next regressions take the form of the following equation:

After estimating the response of bank loan portfolios to securitization over the entire sample period, I separately examine two periods of deregulation to estimate the response of bank loan portfolios to both deregulatory shocks and trends in securitization. As such, I estimate regressions as in the following equations:

2.2 Data and descriptive statistics The two main data sources used in the analysis are the Call Reports of Condition and Income and the Flow of Funds Accounts. The Call Reports provide balance sheet and income statement data for commercial banks. The Call Reports provide information on loans that are secured by real estate, including both personal and commercial loans, non-real-estate-backed loans used for commercial and industrial use (C&I Loans) and personal loans, agricultural loans, and other loans, such as interbank loans. While these loan categories are broad, they allow an examination of the degree banks concentrate their lending in loans collateralized by real estate versus loans that are not collateralized.

2.3 Trends in key variables Fig.1.Bank loan portfolio shares, 1976–2003. This figure plots by year the average share of banks’ loan portfolios comprised by C&I, personal, real-estate-backed and agriculture loans. Data are taken from the June Call Reports of Income and Condition. Variables are computed at the bank holding company level, when applicable.

Fig. 2. Bank real-estate-backed loan portfolio shares, 1976–2003 Fig. 2. Bank real-estate-backed loan portfolio shares, 1976–2003. This figure plots by year the average share of banks' loan portfolios comprised by all real-estate-backed, residential real-estate-backed, non-residential real-estate-backed, construction,and farmland loans. Data are taken from the June Call Reports of Income and Condition. Variables are computed at the bank holding company level, when applicable.

Fig. 3. Securitization, 1976–2003. This figure plots by year securitization of real-estate-backed loans from 1976 to 2003. The measure of securitization is the value of loans outstanding in a given year that have been securitized as reported by the Flow of Funds accounts divided by the value of loans in a given category on commercial banks' balance sheets. Data are taken from the June Call Reports of Income and Condition.

03 Estimation results

3.1 Bank loan portfolios and securitization

Focusing on the coefficients on bank size and the interaction between securitization and bank size, we see that larger banks make more C&I loans from the positive and significant coefficient of 0.028 on the LogBankAssets in column (1). However, once the variable Securitization takes values greater than 2, larger banks make fewer C&I loans compared to smaller banks, as indicated by the negative and significant coefficient on the interaction between Securitization and LogBankAssets of -0.014. Turning to the estimates for personal loan shares in column (2), we see that larger banks make fewer personal from the significant coefficient of -0.013 on LogBankAssets. As securitization increases, larger banks make even fewer personal loans, reflected by the significant and negative coefficient of -0.004 on the interaction between Securitization and LogBankAssets. Thus, we see from the estimates in columns (1) and (2) that larger banks make relatively fewer commercial and personal loans in response to greater securitization compared to smaller banks. Turning to the estimates in the Table, column (3), we see that non-residential real-estate-backed loans do not comprise a significantly larger share of larger banks' loan portfolios from the statistically insignificant coefficient on LogBankAssets. However, the positive and significant coefficient (0.036) on the interaction between Securitization and LogBankAssets shows that as soon as the ratio of securitized loans to loans held by banks is positive, larger banks make more non-residential real-estate-backed loans compared to smaller banks. Finally, column (4) shows that larger banks make more real-estate-backed loans overall from the significant coefficient (0.021) on LogBankAssets.

Overall, the estimated coefficients reported in Table show that larger banks make more real-estate-backed loans relative to smaller banks in response to a greater ability to securitize these types of loans. We also see that older banks make more C&I loans and personal loans as securitization increase from the positive and significant coefficients of 0.017 and 0.018 on the interaction between Securitization and LogBankAge in columns (1) and (2). Older banks reduce their real-estate-backed lending, particularly non-residential real-estate-backed lending, as securitization increases, as indicated by the negative and significant coefficients of -0.089 and -0.030 on the interaction of Securitization and LogBankAge in columns (3) and (4).

The report estimates for the loan pricing regression specified by Eq The report estimates for the loan pricing regression specified by Eq. (2) in the Table. We see that larger banks charge higher interest and fees in each loan category from the positive, significant coefficients on LogBankAssets, but as securitization increases larger banks increasingly lower their fees relative to smaller banks, indicated by the negative, significant coefficients on the interaction between Securitization and LogBankAssets. Likewise, older banks charge higher fees as securitization increases, as shown by the positive and significant coefficients on the interaction between Securitization and LogBankAge. Overall, the estimates reported in Table 3 support the view that the rise in real-estate-backed loan securitization over the period 1976–2003 led to an expansion of credit to borrowers and reduced lending costs, especially among the largest and youngest banks.

3.2 Economic magnitudes

The table reports changes in loan portfolio composition given the increase in securitization and post deregulation given an increase from the 25th to 75th percentile in log bank size and log bank age. Panel A reports the changes during the period of state-wide deregulation, corresponding to the estimates in the first specification for each dependent variable in Table. Postderegulation refers to the increase after both intrastate and interstate branching deregulations have been enacted in a state. Panel B reports the changes during the period of national deregulation, corresponding to the estimates in the first specification for each dependent variable in Table. The changes are calculated by mulitplying the estimated coefficients on the interaction of the securitization variable or deregulation indicator variable(s) and log bank size and log bank age by the sample difference between the 75th and 25th percentiles of log bank size and log bank age.

04 Conclusion

Conclusion By examining how commercial banks' loan portfolios to the rise of securitization markets and to deregulation. All banks engage in more real-estate-backed loans and this increase in lending is proportional to the level of securitization in the loan market. Larger banks make more to non-residential real-estate-backed loans compared to smaller banks in response to both securitization and deregulation, as do younger banks. Larger banks and younger banks charge lower interest and fees in response to the rise in securitization. These findings are consistent with larger and younger banks making lower cost loans in response to the rise in securitization markets and expanding access to credit for the borrowers they serve. Smaller banks charge higher interest and fees, suggesting that they charge borrowers a premium for their greater screening ability relative to larger banks, or that competition in these loan categories is reduced as larger banks are not able to judge credit quality and make loans to these borrowers as extensively as smaller banks. These results further suggest that larger banks and younger banks shift their lending towards hard information loans in response to deregulation and the increasing ability to take advantage of loan securitization markets. While the analysis cannot strictly identify whether innovation in securitization markets encourages consolidation and larger bank size after deregulation, or vice versa, it points to a clear association between larger bank size, securitization, deregulation, and greater lending in real-estate-backed loans, especially by larger banks.

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