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Bank loan sales: a new look at the motivations for secondary market activity

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  • Rebecca Demsetz

Abstract

Bank lending traditionally involves the extension of credit that is held by the originating bank until maturity. Loan sales allow banks to deviate from this pattern by transferring loans in part or in their entirety from their own books to those of another institution. This paper uses a new methodology to test the validity of two hypotheses regarding banks' motivations for selling and buying loans: (1) the comparative advantage hypothesis, that banks with a comparative advantage in originating loans sell and those with a comparative advantage in funding loans buy, and (2) the diversification hypothesis, that banks lacking the ability to diversify internally use loan sales and purchases to achieve diversification. A third hypothesis -- that reputational barriers can limit access to the secondary market -- is considered as well, with particular attention paid to the importance of affiliate relationships in explaining secondary market activity. Together, the evidence relating to these three hypotheses helps clarify the benefits of an active secondary loan market. It also generates predictions regarding the future of that market in a world of rapid consolidation and disappearing barriers to geographical expansion.

Suggested Citation

  • Rebecca Demsetz, 1999. "Bank loan sales: a new look at the motivations for secondary market activity," Staff Reports 69, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:69
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    References listed on IDEAS

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    Cited by:

    1. Milind M. Shrikhande & Larry D. Wall, 2000. "Managing the risk of loans with basis risk: sell, hedge, or do nothing?," FRB Atlanta Working Paper 2000-25, Federal Reserve Bank of Atlanta.
    2. Rustom M. Irani & Ralf R. Meisenzahl, 2015. "Loan Sales and Bank Liquidity Risk Management: Evidence from a U.S. Credit Register," Finance and Economics Discussion Series 2015-1, Board of Governors of the Federal Reserve System (U.S.).
    3. David P. Ely & Kenneth J. Robinson, 2001. "Consolidation, technology, and the changing structure of banks' small business lending," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 23-32.
    4. Affinito, Massimiliano & Tagliaferri, Edoardo, 2010. "Why do (or did?) banks securitize their loans? Evidence from Italy," Journal of Financial Stability, Elsevier, vol. 6(4), pages 189-202, December.
    5. Ivashina, Victoria, 2009. "Asymmetric information effects on loan spreads," Journal of Financial Economics, Elsevier, vol. 92(2), pages 300-319, May.
    6. repec:fip:fedgfe:2014-115 is not listed on IDEAS

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