THE IMPACT OF SFAS166/167 ON BANK LIQUIDITY AND LENDING

Abstract

This study examines 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 ) The role of securitization in bank liquidity and funding management, Journal of Financial Economics 100, 663–684] between affected banks and control banks. We find that SFAS166/167 is significantly associated with a reduction in the use of securitization to enhance on-balance sheet liquidity, consistent with the view that consolidation on balance sheets may render the securitization of loans too costly to be considered an effective source of liquidity. In addition, we find that affected banks with the highest increase in liabilities from consolidating Qualified Special Purpose Entities (QSPEs) experienced a significant decrease in lending activities relative to the control banks. This is likely because consolidating former QSPEs may adversely affect the ability and willingness of banks to engage in securitization and issue new loans. Taken together, our 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 to a significant decline in lending.