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Loan Sales and the Cost of Bank Capital


  • George Pennacchi


This paper demonstrates that if banks are faced with significant competition for deposit financing, as well as regulatory constraints in the form of required capital and/or reserves, banks cannot be profitable solely by holding marketable assets. They must provide other services, such as information gathering and monitoring activities related to making loans. For a bank which originates loans, loan selling will likely provide a cheaper source of funds than traditional deposit or equity finance. However, the extent to which banks can sell loans is limited by the ability of the bank--loan buyer contract to overcome a moral hazard problem. The bank’s choice of an optimal loan sales contract is analyzed with and without allowance for recourse.

Suggested Citation

  • George Pennacchi, "undated". "Loan Sales and the Cost of Bank Capital," Rodney L. White Center for Financial Research Working Papers 07-87, Wharton School Rodney L. White Center for Financial Research.
  • Handle: RePEc:fth:pennfi:07-87

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    References listed on IDEAS

    1. Burbidge, John B, 1983. "Government Debt in an Overlapping-Generations Model with Bequests and Gifts," American Economic Review, American Economic Association, vol. 73(1), pages 222-227, March.
    2. Kimball, Miles S., 1987. "Making sense of two-sided altruism," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 301-326, September.
    3. Fischer, Stanley, 1973. "A Life Cycle Model of Life Insurance Purchases," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(1), pages 132-152, February.
    4. Abel, Andrew B, 1985. "Precautionary Saving and Accidental Bequests," American Economic Review, American Economic Association, vol. 75(4), pages 777-791, September.
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