Do Lenders Still Monitor When They Can Securitize Loans?

We examine how securitization markets affect the role of banks as monitors in corporate lending. We find that banks active in securitization impose looser covenants on borrowers at origination. After origination, these borrowers take on substantially more risk than do borrowers of non-securitization-active banks. We use borrowers' geographic locations to instrument for borrower-lender matching to distinguish the effect of securitization on the banks' ex post monitoring from its effect on ex ante screening. We further investigate direct evidence of banks' monitoring role by examining their actions following covenant violations and find that securitization-active lenders are more likely to grant waivers without changing loan terms. Our results suggest that banks exert less effort on ex post monitoring when they can securitize loans.