I was reading about the benefits and harms of securitisation. A research piece suggested "Reducing overreliance on the banking system" with 2 sub-points:

  1. Corporates can access to the funding sources directly

  2. Banks can distribute their existing risk and thus free up their balances to undertake more lending

I was wondering if the second point actually isn't valid if point 1 is true. Considering a closed system, when the corporates get funding from investors directly instead of banks, although the banks free up their balance sheet (on the demand side), investors also pull out money from the banks at the same time (supply side). In this sense, only point 1 is true (transfer of lending entity) where point 2 is not beneficial since there is actions in the supply side (provision of saving/deposit from investors).

Is my argument valid? Discussions welcomed.

  • $\begingroup$ In a simple setting, where borrowers and lenders can easily find each other and there is no advantage to being a bank, then there is nothing special about banking and a securitizer may simply be a bank by another name. To me the more interesting questions are 1) do banks actually have an advantage 2) do securitizers sometimes have an advantage 3) under what circumstances is securitization better or worse than banking (such as repeated relationships, soft information, standardization, and imperfect capital markets). $\endgroup$
    – BKay
    Dec 30 '19 at 19:20

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