Competing creditor claims and loan recoverability: evidence from anti-recharacterization laws

Anti-recharacterization laws significantly increase the rights of securitization creditors by allowing the buyers of securitized assets to exclusively and immediately seize collateral in bankruptcy. However, strengthening the rights of securitization creditors can limit other creditors’ ability to recover loans. We find that, after a state adopts an anti-recharacterization law, local banks operating in the same state accrue more loan loss provisions, tighten their loan contracts, and incur higher future loan charge-offs. These findings are consistent with the argument that a safe harbor for securitization transactions advantages Wall Street-style structured finance at the expense of Main Street-style lending.