Which statement is true?

I. Securitization increases the funds available for banks to lend.

II. By introducing more players into the game, securitization makes the cost of capital higher.

Correct Answer: I

I is true. Securitization increases the funds available for banks to lend because banks don't have to hold all the loans they originate on their balance sheets. They can increase loan origination, monitoring and collections at economic scales greater than would be possible if they used only in-house loan portfolios.

II is false. A corollary to the increased abundance of capital resulting from securitization is that the rate required on loans is lower; lower interest rates promote increased economic growth.