Publications:
Securitization of Small Business Loans
by Christopher Beshouri and Peter Nigro
OCC Working Paper 94-8, December 1994.
Abstract
This paper assesses the potential impact of securitization in improving small
businesses' access to credit. It begins by examining the nature of small
business lending and the factors that make banks the primary providers of
credit to small businesses. The paper then examines the conditions under which
the benefits of securitization are fully realized and whether the nature of
small business lending satisfies those conditions.
We argue that certain characteristics of small firm finance, especially
information problems and the need for ongoing monitoring, are likely to
mitigate the full benefits of securitization, i.e., the substantial funding
cost advantages. Specifically, loan buyers will demand substantial levels of
loss protection to compensate for their uncertainty over the returns on the
underlying credits and to leave intact the seller's incentive to monitor
properly the loans sold. Loss protection, however, will reduce or eliminate any
funding cost advantages, including capital cost reductions. In the absence of
lower funding costs, banks are unlikely to undertake substantial new lending to
small businesses. Securitizations of small business loans could still take
place, but they are likely to be undertaken for special purposes rather than as
a primary funding mechanism.
Disclaimer
As with all OCC Working Papers, the opinions expressed in this paper are those
of the author alone, and do not necessarily reflect the views of the Office of
the Comptroller of the Currency or the Department of the Treasury.
Any whole or partial reproduction of material in this paper should include the
following citation: Beshouri, Christopher, and Peter Nigro, "Securitization of
Small Business Loans," Office of the Comptroller of the Currency, E&PA Working
Paper 94-8, December 1994.
Availability
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