Securitization and Lending Competition

We study the eects of securitization on interbank lending competition when banks see private signals of local applicants' repayment chances. If banks cannot securitize, the outcome is e¢ cient: they lend to their most creditworthy local applicants. With securitization, banks lend also to remote applicants with strong observables in order to lessen the lemons problem they face in selling their securities. This reliance on observables is ine¢ cient, raises the mean default risk, and may lead to a deceptive rise in credit scores.