Intermediary financing without commitment

Intermediaries reduce agency problems through monitoring, but credible monitoring requires sufficient retention until the loan matures. We study credit markets when intermediaries cannot commit to retention. Two structures are examined: investors lending alongside an all-equity bank and investors lending through the bank via short-term debt. With a commitment to retention, they are equivalent. Without commitment, the all-equity bank sells loans and reduces monitoring over time. Short-term debt encourages the intermediary to retain loans and incentivizes monitoring. Our analysis provides a novel mechanism for intermediaries’ reliance on short-term debt—the constant repricing of debt creates incentives that resolve the commitment problem in loan retention and monitoring.