Asymmetric information and the securitization of SME loans

Abstract

Using data from the Italian credit register encompassing all loans granted to firms, we examine the correlations between risk-transfer and default probabilities to gauge the severity of informational asymmetries in the securitization market for loans to small and medium enterprises (SMEs). First, the analysis confirms the presence of information frictions. Second, the unconditional quality of securitized loans remains significantly higher than that of non-securitized ones, consistent with the view that market participants anticipate the presence of information frictions and carefully select which loans to securitize to offset the detrimental effects of asymmetric information. Third, by analyzing firms with multiple bank relationships, we provide insights into the relative importance of adverse selection and moral hazard as forms of informational friction. While adverse selection is widespread, moral hazard is primarily observed in weaker relationships, implying that loans in these cases exhibit limited commitment from banks to engage in costly monitoring.