Loan Sales and the Cost of Bank Capital
This paper considers a model where banks may improve the returns on loans by monitoring borrowers. Bank regulation, together with compe titive deposit and equity financing, can give banks an incentive to s ell loans, but the extent of their loan selling is limited by a moral hazard problem. A solution is given for the optimal design of the ba nk-loan buyer contract which alleviates this moral hazard problem. An explanation is also given to why some banks might buy loans and why loan sales volume has recently increased. Copyright 1988 by American Finance Association.
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Volume (Year): 43 (1988)
Issue (Month): 2 (June)
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