Going for Broke: Bank Reputation and the Performance of Opaque Securities

Abstract

Can banks’ reputational concerns improve the quality of opaque, off‐balance sheet securities, such as mortgage‐backed securities? We study this question in a uniquely parsimonious setting. In the 1760s, Dutch banking partnerships securitized West‐Indian plantation mortgages that were risky and opaque. High‐reputation banks originated better mortgages and issued securities that, on average, retained 17.5% more of their value during a market collapse. Reputational effects are attenuated when the managing partners were married into wealth or received a large share of profits in the short term, suggesting that bank reputation only works if bankers are personally exposed to (long‐run) reputational losses.