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Moral hazard and adverse selection in the originate-to-distribute model of bank credit

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  • Berndt, Antje
  • Gupta, Anurag

Abstract

Bank credit has evolved from the traditional relationship banking model to an originate-to-distribute model. We show that the borrowers whose loans are sold in the secondary market underperform their peers by about 9% per year (risk-adjusted) over the three-year period following the initial sale of their loans. Therefore, either banks are originating and selling loans of lower quality borrowers based on unobservable private information (adverse selection), and/or loan sales lead to diminished bank monitoring that affects borrowers negatively (moral hazard). We propose regulatory restrictions on loan sales, increased disclosure, and a loan trading exchange/clearinghouse as mechanisms to alleviate these problems.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 5 (July)
Pages: 725-743

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Handle: RePEc:eee:moneco:v:56:y:2009:i:5:p:725-743

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Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: Syndicated loans Secondary loan market Originate-to-distribute Moral hazard Adverse selection;

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Citations

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Cited by:
  1. Nada Mora, 2010. "Lender exposure and effort in the syndicated loan market," Research Working Paper RWP 10-12, Federal Reserve Bank of Kansas City.
  2. Spiros Bougheas, . "Pooling, Tranching and Credit Expansion," Discussion Papers 12/10, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  3. Li, Zhe & Sun, Jianfei, 2011. "Bank competition, securitization and risky investment," MPRA Paper 34173, University Library of Munich, Germany.
  4. Cécile Bastidon, 2014. "Households credits and financial stability," Post-Print hal-01021280, HAL.
  5. Fabian Lindner, 2014. "The Interaction of Mortgage Credit and Housing Prices in the US," IMK Working Paper 133-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  6. Liu, Luke, 2011. "Securitization and moral hazard: Does security price matter?," MPRA Paper 35004, University Library of Munich, Germany.
  7. Parlour, Christine A. & Winton, Andrew, 2013. "Laying off credit risk: Loan sales versus credit default swaps," Journal of Financial Economics, Elsevier, vol. 107(1), pages 25-45.
  8. Sara Malekan & Georges Dionne, 2012. "Securitization and Optimal Retention under Moral Hazard," Cahiers de recherche 1221, CIRPEE.
  9. Jarrow, Robert A., 2011. "Credit market equilibrium theory and evidence: Revisiting the structural versus reduced form credit risk model debate," Finance Research Letters, Elsevier, vol. 8(1), pages 2-7, March.
  10. Agnès Bénassy-Quéré & Benoît Coeuré & Pierre Jacquet & Jean Pisani-Ferry, 2009. "The Crisis: Policy Lessons and Policy Challenges," Working Papers 2009-28, CEPII research center.
  11. Arnold, Marc, . "Banks’ Loan Screening Incentives with Credit Risk Transfer: An Alternative to Risk Retention," Working Papers on Finance 1402, University of St. Gallen, School of Finance.
  12. Ing-Haw Cheng & Sahil Raina & Wei Xiong, 2013. "Wall Street and the Housing Bubble," NBER Working Papers 18904, National Bureau of Economic Research, Inc.
  13. Arnold, Marc, 2013. "The Impact of the Regulation of Centrally Cleared Credit Risk Transfer and Capital Requirements on Banks’ Lending Discipline," Working Papers on Finance 1321, University of St. Gallen, School of Finance.
  14. Zagonov, Maxim, 2011. "Securitization and bank intermediation function," MPRA Paper 34961, University Library of Munich, Germany, revised Sep 2011.
  15. Christopher J. Mayer & Edward Morrison & Tomasz Piskorski & Arpit Gupta, 2011. "Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide," NBER Working Papers 17065, National Bureau of Economic Research, Inc.
  16. Al-Yahyaee, Khamis Hamed, 2014. "Shareholder wealth effects of stock dividends in a unique environment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 66-81.
  17. Pagès, H., 2012. "Bank monitoring incentives and optimal ABS," Working papers 377, Banque de France.
  18. Cécile Bastidon, 2013. "Un modèle théorique d'intermédiation : transmission et gestion des chocs," Post-Print hal-00806524, HAL.
  19. Ahn, Jung-Hyun & Breton, Régis, 2014. "Securitization, competition and monitoring," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 195-210.
  20. M. Imtiaz Mazumder & Nazneen Ahmad, 2010. "Greed, financial innovation or laxity of regulation?: A close look into the 2007-2009 financial crisis and stock market volatility," Studies in Economics and Finance, Emerald Group Publishing, vol. 27(2), pages 110-134, June.
  21. Leo F. Goodstadt, 2009. "The Global Crisis: Why Regulators Resist Reforms," Working Papers 322009, Hong Kong Institute for Monetary Research.

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