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Loan Sales and the Cost of Bank Capital
Author(s) -
PENNACCHI GEORGE G.
Publication year - 1988
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1988.tb03945.x
Subject(s) - moral hazard , loan , loan sale , participation loan , cross collateralization , non conforming loan , business , finance , equity (law) , bridge loan , concentration risk , incentive , non performing loan , soft loan , financial system , economics , microeconomics , political science , law
This paper considers a model where banks may improve the returns on loans by monitoring borrowers. Bank regulation, together with competitive deposit and equity financing, can give banks an incentive to sell 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 bank‐loan buyer contract that alleviates this moral‐hazard problem. An explanation is also given as to why some banks might buy loans and why loan sales volume has recently increased.