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

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  • Rebecca S. Demsetz
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    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.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 69.

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    Date of creation: 1999
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    Handle: RePEc:fip:fednsr:69

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    Related research

    Keywords: Loan sales ; Bank loans ; Secondary markets;

    References

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    1. George Pennacchi, . "Loan Sales and the Cost of Bank Capital," Rodney L. White Center for Financial Research Working Papers 7-87, Wharton School Rodney L. White Center for Financial Research.
    2. Carlstrom, Charles T. & Samolyk, Katherine A., 1995. "Loan sales as a response to market-based capital constraints," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 627-646, June.
    3. Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 389-411, June.
    4. Rebecca S. Demsetz, 1994. "Evidence on the relationship between regional economic conditions and loan sales activity," Proceedings 40, Federal Reserve Bank of Chicago.
    5. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August.
    6. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, 1997. "The effects of megamergers on efficiency and prices: evidence from a bank profit function," Finance and Economics Discussion Series 1997-9, Board of Governors of the Federal Reserve System (U.S.).
    7. Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, vol. 46(2), pages 135-164, November.
    8. Christine Pavel & David Phillis, 1987. "Why commercial banks sell loans: an empirical analysis," Proceedings 152, Federal Reserve Bank of Chicago.
    9. Joseph G. Haubrich & James B. Thomson, 1993. "Loan sales, implicit contracts, and bank structure," Working Paper 9307, Federal Reserve Bank of Cleveland.
    10. Christine Pavel & David Phillis, 1987. "Why commercial banks sell loans: an empirical analysis," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 3-14.
    11. Charles T. Carlstrom & Katherine A. Samolyk, 1993. "Loan sales as a response to market-based capital constraints," Working Paper 9313, Federal Reserve Bank of Cleveland.
    12. Allen N. Berger & Anil K. Kashyap & Joseph Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been," Center for Financial Institutions Working Papers 96-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
    13. Rebecca Demsetz, 1993. "Recent trends in commercial bank loan sales," Quarterly Review, Federal Reserve Bank of New York, issue Win, pages 75-78.
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    Cited by:
    1. 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.
    2. Ivashina, Victoria, 2009. "Asymmetric information effects on loan spreads," Journal of Financial Economics, Elsevier, vol. 92(2), pages 300-319, May.
    3. 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.
    4. Larry D. Wall & Milind M. Shrikhande, 2000. "Managing the risk of loans with basis risk: sell, hedge, or do nothing?," Working Paper 2000-25, Federal Reserve Bank of Atlanta.

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