The Impact of SFAS166/167 on Bank Liquidity and Lending

• In Event: More Financial Reporting

Abstract

This study investigates whether and to what extent SFAS166/167 changed the role of securitization in bank liquidity and lending activities. We compare the sensitivity of on-balance sheet loan growth to the loan portfolio liquidity index proposed by Loutskina (2011) between affected banks and control banks. We find that SFAS166/167 have significantly reduced the role of securitization in substituting on-balance sheet liquidity, consistent with the conjecture that consolidation on balance sheets might render the securitization of loans too costly to be considered a source of liquidity. In addition, we find that the affected banks have reduced lending relative to the control banks because consolidating former Qualified Special Purpose Entities (QSPE) might significantly adversely affect the banks’ ability and willingness to engage in securitization and issue new loans. Finally, our results suggest that banks with the highest increase in liabilities from QSPEs experienced the greatest decrease in lending activities. Taken together, these results suggest that SFAS166/167 requiring the consolidation of former QSPEs led to a decline in the role of securitization as a liquidity management tool in banks and a significant decline in lending.

Authors

• Qiuhong Zhao, Texas A&M University - Corpus Christi

• Dana A Forgione, University of Texas-San Antonio